**UNITED STATES**

# **SECURITIESAND EXCHANGE COMMISSION**

 

**Washington,D.C.  20549**

 

----

 

**FORM 10-K/A**

**AMENDMENT NO.2 TO**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscalyear ended December 31, 2000**

 

----

 

**ACTV, Inc.**

 

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**

(State or other jurisdiction ofincorporation or  organization)                  |   | **94-2907258**

(I.R.S. Employer Identification No.) |
|-----------------------------------------------------------------------------------------------|--------|------------------------------------------------------|
|                                                                                          |   |                                                 |
| **225  Park Avenue South**

**New York, New  York**

(Address of principal executive offices) |   | **10003**

(Zip Code)                                |

 

**(212) 497-7000**

(Registrant’s telephone number, including area code)

 

Securitiesregistered pursuant to Section 12 (g) of the Act:

 

# **Common Stock, par value $0.10 per share**

(Title of Class)

 

----

 

                Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Sections13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ý  No o

 

                Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. 

 

                As of March 22, 2001, theaggregate market value of the voting stock held by non-affiliates of theregistrant (based on The Nasdaq Stock Market closing price of $4.00 onMarch 22, 2001) was $224,227,348.

 

                Asof March 22, 2001, there were 56,056,837 shares of the registrant’s commonstock outstanding.

 

 

**SPECIAL NOTEREGARDING FORWARD LOOKING STATEMENTS**

 

                This annual report on Form 10-K/A containsforward–looking statements as defined by the Private SecuritiesLitigation Reform Act of 1995. Forward– looking statements includestatements concerning plans, objectives, goals, strategies, future events orperformance and underlying assumptions and other statements that are other thanstatements of historical facts. These statements are subject to uncertaintiesand risks including, but not limited to, product and service demand andacceptance, changes in technology, economic conditions, the impact ofcompetition and pricing, government regulation, and other risks defined in thisdocument and in statements filed from time to time with the Securities andExchange Commission. All such forward–looking statements are expressly qualifiedby these cautionary statements and any other cautionary statements that mayaccompany the forward-looking statements. ACTV, Inc. disclaims anyobligations to update any forward–looking statements to reflect events orcircumstances after the date hereof.

 

**INTRODUCTORY NOTE**

 

                This amendment No. 2 to Form 10-K/A is being filed togive effect to the restatement of the Company’s consolidated financialstatements as discussed in Note 20 to the consolidated financial statements. The terms “we,” “our,” and “ACTV” used hereinrefer to ACTV, Inc. and its subsidiaries.

 

 

**PART I**

 

**Item 1.  Business**

 

**Overview**

 

                We are a digital media companythat provides technical and creative services, tools and proprietaryapplications for digital television and enhanced media. We have two operatingbusiness segments, which we call Digital TV and Enhanced Media.

 

                We have developed a range ofservices, products and proprietary technologies for each of these businesssegments. Our Digital TV technologies enable television programmers andadvertisers to create individualized programming for digital televisiontransmission systems. We believe that our Digital TV technologies are unique inproviding targeting, interactivity and accountability for televisioncommercials, and in giving viewers the ability to instantly customize theirviewing experiences for a wide variety of programming applications. OurEnhanced Media technologies allow both for the enhancement of video and audiocontent, including standard TV programming, with Web-based information andinteractivity, and for the delivery of games through the Internet. For theEnhanced Media market, we are a leading provider of technology and servicesthat synchronize the delivery of television programming and Internet content.

 

                We believe that the newapplications enabled by the expansion of digital TV transmission systems andTV/Internet convergence platforms will revolutionize television as we know itby turning passive viewing into an interactive experience. Digital and convergencetechnology will allow television distributors, advertisers and programmers tobring interactivity to a mass audience. We believe that our proprietarytechnologies, tools, applications, and ability to deliver technical andcreative services uniquely position us to capitalize on this anticipateddigital television revolution.

 

                To assist in our development ofACTV as a full-service digital media company, we received strategic investmentsfrom Liberty Digital Inc., our largest shareholder, and Motorola BroadbandCommunications Sector.

 

                ACTV, Inc. was incorporatedunder the laws of the State of Delaware in July, 1989. ACTV, Inc. is thesuccessor, by merger effective November 1, 1989, to ACTV, Inc., aCalifornia corporation organized in July 1983. Our executive offices arelocated at 225 Park Avenue South, New York, New York 10003, telephone number(212) 497-7000.

 

2

----

# **Industry Background**

 

*Digital TV*

 

                Although television programming is produced fornational, regional and local audiences, it has not been commercially exploitedas an individualized services medium. According to Paul KaganAssociates, Inc. (“Kagan”), over 98% of U.S. households have televisionsand approximately 67% of those households subscribe to cable televisionservices. We do not believe that there is currently any television service,widely available to consumers, providing individualized programming.Historically, two factors have limited development of individualizedprogramming: (1) the shortage of channel capacity in a typical cablesystem and (2) the lack of digital technology available to provide suchindividualized services. However, advances in digital transmission and set-topbox technology have begun to eliminate these barriers to providingindividualized programming.

 

                The development of compression technology and thedigital transmission of television signals allows for the transmission of agreater number of channels with better audio and video quality. The resultingexpansion of channel capacity allows a cable or Direct Broadcast Satellite(“DBS”) broadcaster to offer a wider variety of programming choices, includingindividualized programming. Traditional analog cable systems typically offer alimited number of programming channels. Current digital compression technology,however, allows the conversion of each analog channel into as many as twelvedigital channels of programming. Many major U.S. cable operators are thereforeconverting significant portions of their systems from analog to digital.

 

                The technology necessary toprovide our Digital TV applications will become increasingly available as cablesubscribers have increased access to digital set-top boxes. Kagan estimatesthat nearly 11 million U.S. cable subscribers had digital set-top boxes atyear-end 2000, projecting the number to grow to approximately 43 millionin 2004, and 60 million in 2009. We believe that sales of digital set-topboxes will increase rapidly as prices decrease. Prices for digital set-top boxeshave declined nearly 20% in the past year and we expect this trend to continue,as chip vendors reduce the cost of the decoders and tuners that are the maincomponents of the set-top boxes.

 

                DBS is a digital televisiontransmission system. We believe that in the future our Digital TV technologiesmay expand to DBS platforms. Kagan has estimated that DBS had approximately15 million subscriber households at the end of 2000, and projects anincrease in this number to approximately 25 million in 2004, and28 million in 2009.

 

                Advertising represents a critical application of ourDigital TV technologies. According to Morgan Stanley Dean Witter, advertisersspent approximately $55 billion on television advertising in the UnitedStates in 2000. Although traditional television broadcasting, cable and DBSsystems do not provide an integrated means for viewers to respond to programsand advertisements, the Direct Marketing Association, Inc. (“DMA”)estimates that approximately $105.8 billion of goods and services werepurchased through direct response television programming and advertising in1999. The DMA predicts that this amount will grow to approximately$159.8 billion in 2004. (Reprinted from Economic Impact: USDirect & Interactive Marketing Today 1999 with permission from theDirect Marketing Association, Inc.) Many advertisers are using televisionadvertisements to generate requests for product information, which in turnserve as sales leads for their products and services. Today, most directresponse television purchases and requests for information require a telephonecall, causing advertisers to incur a significant cost per transaction. Webelieve that television viewers, advertisers and merchants will respondfavorably to a simple, immediate, inexpensive and automated method enablingthem to participate in television commerce.

 

*Enhanced Media*

 

                The Internet has grown rapidlyover the past several years and is now a medium used by millions of people forentertainment, education, e-commerce and multimedia content. Nielsen / NetRatings estimates that in mid-1999 there were 63.4 million active Internetusers in the United States and a total of 105.4 million users withInternet access. Growing use of the Internet and the World Wide Web has createdopportunities for television content providers and their advertising customersto reach and interact with millions of Internet users.

 

3

----

                The increasing popularity of theInternet and the established popularity of television have led a growing numberof home computer users to simultaneously access Internet content while theywatch television. According to Dataquest Inc., a unit of GartnerGroup, Inc., there are over 44 million people in the United Stateswho simultaneously use the television and Internet–connected PCs at leastsome of the time.

 

                Due to its interactive nature, the Internet is anemerging medium that competes with traditional television because of itsability to provide customized, targeted programming and advertising toconsumers and to generate cost-effective results for certain advertisers.According to Jupiter Communications (“Jupiter”), approximately 45% of Internetusers maintain that they watch less television because of time spent online. Tocombat this migration and gain online market share, broadcasters and cableprogrammers have begun and are expected to continue promoting companion onlineprogramming during shows and using commercial airtime to drive viewers to farmore lucrative online programming. We believe we are well positioned to takeadvantage of this shift in consumer media consumption and that the convergenceof television and Internet content promises significant opportunities forenhanced entertainment programming.

 

                Despite the current downturn inInternet advertising, we believe that the opportunities for televisionprogrammers to generate additional advertising revenues are increasing due tothe growing recognition by advertisers of the potential advantages of Internet–basedadvertising that complements television programming. The Internet is highlyinteractive, creating enhanced opportunities for advertisers to focus theirmarketing efforts on specific user groups, to directly distribute targetedinformation to consumers on an individualized basis and to receive timelyfeedback from customers and potential customers. Jupiter estimates that theamount of Web advertising worldwide will grow from $5.3 billion in 2000 toover $16.5 billion by the year 2005. Additionally, as merchants take advantageof the Internet to deliver a guided selling experience on-line, integratingintelligent product recommendations, real-time customer service and simplifiedbuying procedures, more consumers are expected to engage in e-commerce. TheGartner Group estimates that the total value of consumer goods and servicespurchased over the Web will increase from $30 billion in 2000 to$143 billion by the year 2004. The combination of growth in onlineadvertising and e-commerce enhances the Internet’s value as a commerce medium.

 

**Digital TV**

 

                Our core technologies forDigital TV are patented processes for creating interactive and instantlycustomized television content and advertising in response to viewer remotecontrol entries or to information stored locally in a viewer’s set-top box. Oursoftware-only application, which resides in the digital set-top, remembers aviewer’s inputs throughout a program and can later deliver tailored content tothe viewer based on those inputs. We create individualized programming bysimultaneously sending the viewer multiple television signals, related in timeand content, and switching among those signals without a visually perceptibledelay. The viewer experiences the video, audio and graphics of a single fluidprogramming stream, while the programming on the other signals remainstransparent. We expect to generate Digital TV revenues from software licensefees, subscriber fees and sales of technical and professional services.

 

                The first commercialapplications of our Digital TV technologies will be for advertising and sportsentertainment programming. We have branded our Digital TV applications foradvertising and entertainment as SpotOn and One To One TV, respectively. Webelieve that our Digital TV technologies represent a core breakthrough fortelevision programming and advertising. For example:

 

•                  neighbors watching the same television program cansee entirely different advertisements based upon demographic information storedin their respective set-top boxes;

 

•                  a car commercial can ask viewers to identify themodels that most interest them and, based upon their answers, provideindividualized information about the identified models;

 

•                  the viewer of a sporting event telecast can selectfrom features such as a different view of the action, highlight packages,statistics or instant replays; and

 

•                  a child viewing a program can engage a favoritetelevision character in what seems to be a one-on-one dialogue.

 

4

----

                We are initially targeting SpotOnand One To One TV for distribution through cable operators that have deployeddigital transmission systems. We expect eventually to offer our Digital TVapplications through other programming distribution systems, including directbroadcast satellite, or DBS, and terrestrial digital. To receive SpotOn and OneTo One TV, all a viewer needs is a digital set-top box with our softwaredownload. We have agreements with leading manufacturers of digital set-topterminals—Motorola Broadband Communications Sector, Scientific–Atlanta andPioneer for the integration of our software into their equipment.

 

*SpotOn and OneTo One TV*

 

                We created a company withMotorola Broadband Communications Sector, called Digital ADCO, Inc., whichdeveloped the SpotOn applications and services. OpenTV later joined MotorolaBroadband Communications Sector and ACTV as a shareholder of DigitalADCO, Inc. SpotOn is a comprehensive end-to-end system that allows digitalcable, satellite and broadcast systems to offer targeting, interactivity andaccountability for television commercials. We believe that SpotOn will improvethe effectiveness of television advertising.

 

                Based on proprietarytechnologies contributed by Motorola, OpenTV and ACTV, SpotOn provides an arrayof functionalities that we believe are unique. For example, our software caninstantaneously choose the most appropriate commercial for each viewer from anumber of alternatives received by the viewer’s set-top. SpotOn’s logicfunction makes this choice based either on demographic information that the TVdistributor, e.g., cable operator, has downloaded to the set–top box oron remote control responses keyed in by the viewer. SpotOn can even discernthat a viewer is watching a program with subtitles in a second language, anddeliver commercials in that language.

 

                With SpotOn, an advertiser can give viewers a choiceof commercials, allowing them to select those of most relevance. Ads cancontain program branches that allow the commercial itself to change course inresponse to viewer selections.

 

                In addition, SpotOn provides themeans for advertisers to receive unprecedented aggregate viewer data for eachcommercial. This information might include the actual number of homes, bygeographic area, where a given commercial was displayed as well as thepercentage of viewers who changed channels or muted the sound during thecommercial.

 

                SpotOn allows for permission–basedmarketing. A subscriber might request additional information on a product ormake merchandise purchases through the set-top box, enabled with SpotOnsoftware.

 

                The deployment of SpotOn in acable system involves principally the installation of software at the headendand a separate software download to subscriber set-top boxes. Depending on howthe headend is equipped, a minimal investment in hardware may also be required.SpotOn, which is compatible with the majority of digital cable set-topscurrently deployed in the United States, is not dependent on the roll-out ofthe next generation of digital boxes. To capitalize fully on the capabilitiesof SpotOn, the operator may also choose to upgrade its trafficking and billingsystem.

 

                Having identified a businessopportunity for next-generation trafficking and billing software that canhandle advanced digital applications such as SpotOn, on December 31, 2000we acquired a controlling interest in the assets of VisionTel, Inc., fromnCUBE Corporation, which retains a minority interest. VisionTel’s principalproduct is the AdVision software suite for advertising sales management incable, broadband, broadcast, satellite, and Internet services. Its clients haveincluded AT&T Broadband, Time Warner, Cox Communications, Texas Cable NewsChannel and Captivate Network, Inc., among others.

 

                SpotOn’s software application in the set-top box isresident at the chip-set level, where it monitors programming streams cominginto the box as well as viewer remote control selections. Commercials that areintended for a targeted audience are marked with our proprietary digital codesthat identify them as SpotOn–enabled. Our software in the set-top boxreads the codes as the commercials are received and, in real time, determinesthe most appropriate one. SpotOn is then able to insert this ad into the TVprogramming stream without any visually perceptible delay. The viewer isunaware that such a switch has occurred.

 

5

----

                We expect SpotOn to generate revenues from multiplesources. We intend to charge a license fee to the TV distributors that deploythe system, as well as upstream license fees to programmers and advertisinginterconnects. We expect to receive fees from advertisers for encoding targetedcommercials, for the storage and transit of the ads, and for creative services.We believe that we will be able to charge a tolling fee for enabling televisioncommerce transactions and that we can generate revenues from programmers andadvertisers for data reporting and analysis. Finally, we expect to generaterevenues from AdVision trafficking and billing services provided to SpotOnclients and non-SpotOn clients alike.

 

                We plan to introduce SpotOn during 2001 throughAT&T Broadband’s approximately 40,000 digital cable subscribers in Aurora,Colorado. SpotOn will be available on AT&T Broadband’s currently deployedDCT-1000 and DCT–2000 digital set-top boxes.

 

                We intend to develop the marketfor One To One TV entertainment programming on a pay-per-view and subscriptionbasis. We believe that the first entertainment applications of One To One TV,whether distributed on a pay-per-view or subscription basis, will be forsports. We believe that sports programming represents a compelling applicationof One To One TV. Our Digital TV technologies allow sports fans to completelyindividualize their TV viewing experience using a standard remote control. 

 

*Intellocity*

 

                On March 9, 2001, wecompleted the acquisition of Intellocity, Inc., a corporation formed under thelaws of the British Virgin Islands (“Intellocity”). The acquisition wasaccounted for as a purchase and was completed by a merger of Intellocity withand into ACTV, Inc. with ACTV, Inc. remaining as the surviving entity. Asconsideration for the merger, we issued to the stockholders of Intellocity:(i) an aggregate of 4,007,890 shares, with an additional 1,252,472 sharesheld in escrow, and (ii) options to purchase an aggregate of 762,655shares of its common stock, with an additional 238,332 options held in escrow.

 

                The acquisition was pursuant toan Agreement and Plan of Merger dated March 7, 2001, between ACTV andIntellocity.  Prior to the date of theAgreement and Plan of Merger, there were no material relationships between usand any of Intellocity’s affiliates, directors, officer or stockholders.

 

                Intellocity is the principalprovider of our technical services for digital television.  A leading professional services and toolsprovider for interactive television, or iTV, Intellocity's customers includebroadband operators, content providers and platform and infrastructureproviders. Services include:

 

•                  Content design and development

 

•                  Content integration on multiple platforms andbroadband networks

 

•                  Viewer interface design, development andintegration

 

•                  Design, development and integration of end-to-endsystem architecture

 

•                  Requirements definition and specification

 

                Intellocity also markets a suiteof applications it has developed, called iTV Studio, which is a tool forcreating, publishing, and broadcasting interactive TV content across multipleplatforms.

 

                The upgrade, which is now inprocess, of the cable TV infrastructure in the United States from analog todigital transmission systems is creating significant opportunities forinteractive television applications. We expect that operators, along withcontent and infrastructure providers, will have an increasing demand for thetools and expertise necessary to develop and implement such applications. Webelieve that Intellocity is well-positioned to capitalize on this new market byselling its professional and technical services and tools for iTV.

 

6

----

                We believe that theacquisition of Intellocity strengthens our position as a leader in the DigitalTV market by broadening our offerings to include a wide variety of advancedinteractive television tools and services.

 

For further discussion regarding segment informationsee Footnote 13 to the consolidated financial statements.

 

**Enhanced Media**

 

*Overview*

 

                Our Enhanced Media businesssegment serves the relatively new but growing market for interactive games andconvergence programming, which combines video and or audio programming with Webcontent. We have been a pioneer in developing and marketing enhanced mediaapplications and services.

 

                We market Enhanced Media applications and servicesthrough the brand names of HyperTV with Livewire, Bottle Rocket, and eSchoolOnline. HyperTV with Livewire and eSchool Online provide convergence softwareand services to the entertainment and education markets, respectively. BottleRocket is a leading developer of online games that it delivers for both stand–aloneand multi–player applications. We acquired Bottle Rocket inAugust 2000 through an exchange of shares with Bottle Rocket, Inc.The acquisition was accounted for as a pooling of interests.

 

                Our Enhanced Media businessderives revenues from a number of sources, including software licensing,technical and content services, data management, online advertising sales, ande-commerce.

 

                We believe that our EnhancedMedia technologies have potential applications for most of television and radioprogramming and advertising. For instance:

 

•                  while watching a sports show on television,viewers can compete with other fans using a Web-enabled box, a computerconnected to the Internet, or even a wireless hand-held device;

 

•                  viewers of a rock concert being streamed throughthe Internet can receive synchronized Web pushes with song lyrics, informationabout the band, and special offers to purchase CDs of the band or othermerchandise;

 

•                  a TV car commercial can automatically deliver moredetailed information through the Internet and let viewers link to local dealerWebsites where viewers can schedule test drives.

 

*HyperTV*

 

                HyperTV technologies are at thebase of our Enhanced Media business. HyperTV is a suite of patented processesthat enhance a television program or advertisement with related andsynchronized content delivered through the Internet. HyperTV enables convergentprogramming by embedding a stream of Web page addresses into the video or audiosignal or by transmitting the addresses directly over the Internet to a user’scomputer or wireless device. The Web content is synchronized to programmingbeing shown on a particular television channel, streamed through the Internet,or played through a local storage device, such as a DVD player.

 

                In April 2000, we enteredinto an agreement with Liberty Livewire to jointly market HyperTV withLivewire. Liberty Livewire is the U.S. leader in audio and videopost-production and location services. The agreement gives Liberty Livewire, aunit of Liberty Media, the right to provide content creation services and,through its affiliate AT&T IP Services, a scaleable hosting infrastructurefor HyperTV with Livewire. Pursuant to the agreement creating HyperTV withLivewire, we received warrants to purchase 2.5 million shares of LibertyLivewire common stock.

 

                We market HyperTV with Livewireto networks and producers of traditional media content as a turnkey systemconsisting of user software, Web content creation software and creative services,database management and analysis and program hosting. We provide free downloadsfrom our Website of HyperTV with Livewire user software.

 

7

----

 

                We believe that we are theleading provider of convergence software and services. To date, we have enabledhundreds of hours of HyperTV with Livewire programming for music, movies,sports, games and live programming.

 

*Bottle Rocket*

 

                Bottle Rocket creates customizedand licensed online games based on proprietary technology engines includingtrivia, prediction, simulation, fantasy, and game show. Bottle Rocket bringsnot only expertise in high-traffic, high-tech gaming, but sophisticated onlinemarketing and promotional strategies. Clients include such well known names asMajor League Baseball, Madison Square Garden, MTV, HBO, Noggin, the NationalHockey League, The Sporting News, ESPN.com, Electronic Arts and the NationalFootball League.

 

                Bottle Rocket plays an importantrole for us in the development of gaming across a number of platforms. We arenot only expanding Bottle Rocket’s stand–alone and multiple player onlinegaming entertainment from PCs to wireless devices, but we also plan to migrateBottle Rocket applications and content to digital television distributionsystems.

 

*Education*

 

                eSchool Online was the firstcommercial application of our Enhanced Media technologies. eSchool integrateseducational video with relevant Web content, interactivity and chatfunctionality on a student’s computer screen. In addition, eSchool providesteachers and administrators with an application that allows for onlineassessment of a student performance.

 

                We have provided eSchoolsoftware and content and technical services to state departments of education,school districts, and schools throughout the United States. In the past year,we began to focus eSchool on the professional development market. During 2000,we had major projects in California, Texas and Alabama for teacher training inRemedial Reading, Algebra, and Internet skills.

 

                Traditionally, we have providedeSchool Online applications and services on a custom development basis toindividual education clients. During 2000, we began to market completed eSchoolprograms to third parties, under licensing agreements with the clients for whomthe programs were originally produced. It is our intention to build a libraryof licensed eSchool content that is available for nationwide distribution.

 

*Enhanced MediaPlatforms*

 

                Our goal is to extend ourEnhanced Media technologies to all relevant platforms for convergenceprogramming. Initially, HyperTV with Livewire served only TV viewers with PCsconnected to the Internet in the same room. We have since migrated theapplication to function with WebTV and AOLTV, which allow both televisionprogramming and Web content to be viewed at the same time on a TV screen. Asthe installed base of Internet connected handheld devices—like cellular phonesand PDAs—expands, we expect to extend our Enhanced Media technologies to suchdevices. Finally, we intend to deploy our Enhanced Media technologies for mediastreamed through the Internet, as the forecasted proliferation of high-speedInternet connectivity in the U.S. provides opportunities in this market.

 

For the years endedDecember 31, 2000, 1999 and 1998, certain individual customers accounted formore than 10% of the Company's revenues as follows:

 
| **Customer**                          |   | **2000** |   | **1999** |   | **1998** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| The  State of Alabama                 |   | 23%      |   |     |   |     |   |
| San  Diego County Office of Education |   |     |   | 11%      |   |     |   |
| NYC  School Construction Authority    |   |     |   | 12%      |   |     |   |
| School  District of Philadelphia      |   |     |   |     |   | 12%      |   |
| Georgia  Public Television            |   |     |   |     |   | 35%      |   |

 

As of December 31, 2000,one customer, The State of Alabama, represented 32% of the Company's accountsreceivable balance as of December 31, 1999, The San Diego County Office ofEducation represented 22% and The Board of Education of the City of New Yorkrepresented 20% of the accounts receivable balance, respectively.

 

**EquipmentSuppliers**

 

                We do not intend to manufactureset-top converters, terminals, video servers or other devices in connectionwith any of our applications or services.

 

                We have non-exclusive,royalty-free agreements with Motorola Broadband Communications Sector andScientific–Atlanta for the integration of our Digital TV technologies intotheir digital set-top boxes. Motorola Broadband Communications Sector andScientific–Atlanta are the dominant suppliers of set-top terminals in theUnited States. We have a similar integration agreement with Pioneer.

 

                In addition, we have agreementswith the leading providers of set-top box middleware, including OpenTV,Liberate and MicrosoftTV, to ensure the compatibility of our Digital TVtechnologies with their platforms. Middleware is set-top box software that actsas an operating system for the terminal.

 

8

----

                We may grant licenses similar tothose granted to Motorola Broadband Communications Sector, Scientific–Atlantaand Pioneer to other manufacturers that are selected by the future distributorsof Spot On and One To One TV.

 

**Patents andOther Intellectual Property**

 

                We have sought to protect the proprietary features ofour individualized programming technologies and Enhanced Media technologiesthrough patents, copyrights, confidentiality agreements and trade secrets bothin the United States and overseas. As of the present time, the United StatesPatent and Trademark Office has issued 20 patents to us that are currently inforce. We also have additional patents pending. The patents expire at various datesfrom 2003 to 2018. Corresponding patents for some of the above U.S. patentshave been granted by or are pending in the Patent Offices of Canada, Japan,South Korea, China, Singapore, India, Australia and Europe. We believe suchpatents will strengthen our competitive position in these countries.

 

                There can be no assurance thatour patents are enforceable, or, if challenged, that we can successfully defendthem, particularly in view of the high cost of patent litigation, nor can therebe any assurance that we will derive any competitive advantages from them. Tothe extent that patents are not issued for any other products developed by us,we would be subject to more competition. The issuance of patents may beinsufficient to prevent competitors from essentially duplicating our productsby designing around the patented aspects. In addition, we cannot assure youthat our products will not infringe on patents owned by others, licenses towhich may not be available to us, nor that competitors will not developfunctionally similar products outside the protection of any patents we have ormay obtain.

 

                The inventors named on all of our issued patents haveassigned to us all right, title and interest in and to the above U.S. patentsand any corresponding foreign patents or applications based thereon. We requirethat each of our full time employees, consultants and advisors execute aconfidentiality and assignment of proprietary rights agreement upon thecommencement of employment or a consulting relationship. These arrangementsgenerally provide that all inventions, ideas and improvements made or conceivedby the individual arising out of the employment or consulting relationship areour exclusive property. These agreements generally also require all suchinformation be kept confidential and not disclosed to third parties, exceptwith our consent or in specified circumstances. We cannot assure, however, thatthese agreements will provide effective protection for our proprietaryinformation in the event of unauthorized use or disclosure of such information.

 

**Competition**

 

                The markets for digitaltelevision and enhanced media applications and services are extremelycompetitive, and we expect competition to intensify in the future. Thesemarkets are new, quickly evolving and characterized by untested consumer demandand a lack of industry standards. They are, therefore, subject to significantchanges in the products and services offered by existing market participantsand the emergence of new market participants. As a result, it is difficult todetermine which companies and technologies are competing with us or may competewith us in the future in one or more of our businesses.

 

                We believe our competitors inthe enhanced media programming and services markets include RespondTV, GoldPocket Interactive Digital Convergence, Merlin TV, Mixed Signals, More.com, andWorldgate Communications, Inc. Our Bottle Rocket business competes withcompanies that create online games for third parties, such as Boxerjam,Spiderdance, Inc., Twin and Internet gaming consulting firms. In addition,Intellocity’s competitors include Mixed Signals and MetaTV.

 

                We also face competition fromtraditional television and cable broadcasters such as ABC, CBS, FOX, and NBC.Some of these broadcasters have in the past, and may in the future, develop andbroadcast their own television/Internet convergence programming. (See Item 3.LEGAL PROCEEDINGS—Action against the Walt Disney Co., ABC, Inc., and ESPN,Inc.) In addition, we may face future competition with companies such asMicrosoft, RealNetworks, Inc., and Veon that provide applications allowingvideo content to be “streamed” over the Internet. Many of these applicationscould be extended to compete with some or all of our existing or proposed enhancedmedia offerings.

 

9

----

                We do not believe that there are currently anycompetitors offering products comparable to SpotOn and One To One TV. But thereare a number of companies, including NDS Group plc, that market products andservices that have limited functionalities in common with One To One TV. In thesame way, although SpotOn has no competitors that offer its range ofapplications and services, companies such as SeaChange International and WinkCommunications market products that compete with certain SpotOn offerings.Finally, SpotOn and One To One TV compete in a sense for limited “shelf space”within a digital set-top box with other dissimilar applications, such as videoon demand, high definition television, and telephony.

 

 

**GovernmentRegulation**

 

                We believe that neither our present or futureimplementation of One To One TV or SpotOn is subject to any direct substantialgovernment regulation. However, the broadcast industry in general, and cabletelevision, DBS and wireless communication in particular, are subject tosubstantial government regulation.

 

*CableTelevision.*  Pursuant tofederal legislation enacted in 1992, which we call the 1992 Cable Act, andamended by the Telecommunications Act of 1996, the Federal CommunicationsCommission substantially re-regulates the cable television industry in variousareas, including rate regulation, competitive access to programming, and “mustcarry” and retransmission consent for broadcast stations. These rules, amongother things, restrict the extent to which a cable system may profit from, orrecover costs associated with, adding new program channels, impose certaincarriage requirements with respect to television broadcast stations, and limitexclusivity provisions in programming contracts. and require prior notice forchannel additions, deletions and changes. The Cable Act also regulates thecollection and use of subscriber information over cable systems by cableoperators and their affiliates. The United States Congress and the FCC alsohave under consideration, and may in the future adopt, new laws, regulationsand policies regarding a wide variety of matters which could, directly orindirectly, materially adversely affect our operations. In particular, the FCCrecently initiated an inquiry to determine whether the cable industry’s futureprovision of interactive services should be subject to regulations ensuringequal access and competition among service vendors.

 

*Internet.*  Increased regulation of the Internet mightslow the growth in use of the Internet, which could decrease demand for ourservices, increase our cost of doing business or otherwise have a materialadverse effect on our business, financial condition and results of operations.Congress has recently passed legislation regulating certain aspects regardingthe use of the Internet, including children’s protection, copyrightinfringement, user privacy, taxation, access charges and liability for third–partyactivities. The Federal Trade Commission recently adopted regulations enactingthe Children’s Online Privacy Protection Act, which govern collection and useof information over the Internet regarding children. In addition, federal,state and local governmental organizations as well as foreign governments areconsidering other legislative and regulatory proposals that would regulate theInternet. Areas of potential regulation include libel, pricing, quality ofproducts and services, intellectual property ownership and personal privacy. Wecollect and store significant personal information from users of our Digital TVand Enhanced Media applications and plan to use such information to develop ourbusinesses, particularly with respect to targeted advertising, or otherwisegenerate revenues. Storage and use of such information is subject to state andfederal regulation. Storage and use of such information may also subject us toprivacy claims relating to our use and dissemination of personal information.We do not know how courts will interpret laws governing the Internet or theextent to which they will apply existing laws regulating issues such asproperty ownership, libel and personal privacy to the Internet. Therefore, weare not certain how new laws governing the Internet or other existing laws willaffect our business.

 

                We are unable to predict theoutcome of future federal legislation or regulatory proposals or the impact ofany current or future laws or regulations on our operations. There can be noassurance that we will be able to comply with any future laws or regulationsthat may be imposed on our operations.

 

**Employees**

 

                At December 31, 2000, weemployed 250 full-time employees. We are not subject to any collectivebargaining agreements. We believe that our relationships with our employees aregenerally satisfactory.

 

10

----

**Item 2. Property**—**Officesand Facilities**

 

                We maintain our principal andexecutive offices at 225 Park Avenue South, New York, New York, where we leaseapproximately 47,000 square feet. In addition, we lease approximately 12,000square feet in an adjacent building at 233 Park Avenue South. Our lease forthese facilities extends through 2016. We also lease office and technical spacetotaling approximately 51,000 square feet in nine other facilities in New YorkCity; Branchburg, New Jersey; Dallas, Texas; Houston, Texas; Los Angeles,California; Tulsa, Oklahoma and Denver, Colorado. These leases expire atvarious dates through 2005.

 

**Item 3.  Legal Proceedings**

 

                ACTV, Inc. and its wholly–ownedsubsidiary HyperTV Networks, Inc. are co-plaintiffs in a civil actionfiled against The Walt Disney Co., ABC, Inc. and ESPN, Inc. inDecember, 2000, which action alleges that the defendants’ “Enhanced TV” systemsynchronizing a web site application to, amongst others, ESPN *Sunday Night*and ABC *MondayNight Football* telecasts has infringed and is continuing to infringecertain of the plaintiffs’ patents. That action is continuing in the U.S.District Court, Southern District of New York.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

                On May 19, 2000 we held ourAnnual Meeting of Shareholders for which we solicited votes by proxy. Thefollowing is a brief description of the matters voted upon at the meeting and astatement of the number of votes cast for and against, and the number ofabstentions as to each matter.

 

1.                                       Election ofdirectors

 
|          |   | **For**    |   | **Withheld** |   |
|---------------|--------|------------|--------|--------------|--------|
| Bruce Crowley |   | 39,675,468 |   | 211,851      |   |
| Melvyn Klein  |   | 39,675,468 |   | 211,851      |   |

 

2.                                       To approve theadoption of the ACTV’s 2000 Stock Option Plan.

 

| **For**    |   | **Against** |   | **Abstain** |   |
|------------|--------|-------------|--------|-------------|--------|
| 15,763,184 |   | 3,432,422   |   | 100,943     |   |

 

3.                                       To ratify theappointment of Deloitte & Touche, LLP as independent auditors.

 

| **For**    |   | **Against** |   | **Abstain** |   |
|------------|--------|-------------|--------|-------------|--------|
| 39,648,705 |   | 214,494     |   | 24,120      |   |

 

4.                                       To approve anamendment to ACTV’s Restated Certificate of Incorporation to increase thenumber of authorized shares of common stock, $0.10 par value per share from65,000,000 to 200,000,000.

 

| **For**    |   | **Against** |   | **Abstain** |   |
|------------|--------|-------------|--------|-------------|--------|
| 37,549,838 |   | 2,297,598   |   | 39,883      |   |

 

11

----

###### **PART II**

 

**Item 5. Market for the Registrant’s Common Equity and Related StockholderMatters**

 

                ACTV’s common stock is traded onThe Nasdaq Stock Market under the symbols “IATV”.  The following table sets forth the high and low bid prices forACTV common stock as reported by Nasdaq.

 

|             |   | **High**         |   | **Low** |   |
|------------------|--------|------------------|--------|---------|--------|
| **2000 Quarter** |   | **Common Stock** |   |
| First            |   | 46.125           |   | 20.000  |   |
| Second           |   | 34.750           |   | 9.688   |   |
| Third            |   | 19.375           |   | 10.750  |   |
| Fourth           |   | 14.313           |   | 3.000   |   |

 

| **1999 Quarter** |   | **High** |   | **Low** |   |
|------------------|--------|----------|--------|---------|--------|
| First            |   | 8.844    |   | 3.813   |   |
| Second           |   | 25.125   |   | 9.250   |   |
| Third            |   | 16.375   |   | 8.875   |   |
| Fourth           |   | 51.563   |   | 13.250  |   |

 

                On March 21, 2001, there were approximately 476holders of record of ACTV’s 56,056,037 outstanding shares of common stock. OnMarch 21, 2001 the high and low bid prices of the common stock as reportedby Nasdaq were $5.00 and $3.50, respectively. ACTV has not paid cash dividendssince its organization. The Company plans to use earnings, if any, to fundgrowth and does not anticipate the declaration of the payment of cash dividendsin the foreseeable future.

 

**Item 6.  Selected Financial Data (in thousands,except share and per share data)**

 

                Thefollowing selected consolidated financial data of the Company should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the other financial information includedelsewhere in the this Form 10-K/A.

 
|                                                                               |   | **For Years Ended December 31,** |    |
|------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                               |   | **(As Restated)**                |    |
|                                                                               |   | **2000**                         |    | **1999** |   | **1998** |   | **1997** |   | **1996** |   |
| Statement of Operations Data:                                                      |   |                             |    |   |   |   |   |   |   |   |   |
| Revenues                                                                           |   | $                                | 8,016   |   | $ | 2,910 |   | $ | 1,625 |   | $ | 1,948 |   | $ | 1,476 |   |
| Income (loss) before extraordinary item                                            |   | 153,504                          |    | (234,875 | ) | (23,342 | ) | (8,394 | ) | (11,405 | ) |
| Net income (loss)                                                                  |   | 152,093                          |    | (234,875 | ) | (23,342 | ) | (8,394 | ) | (11,405 | ) |
| Net income (loss) applicable to common stockholders                                |   | 152,093                          |    | (235,370 | ) | (23,822 | ) | (8,394 | ) | (11,405 | ) |
|                                                                               |   |                             |    |   |   |   |   |   |   |   |   |
| Basic income (loss) per common share before  extraordinary item                    |   | $                                | 3.10    |   | $ | (6.11 | ) | $ | (1.10 | ) | $ | (0.64 | ) | $ | (0.97 | ) |
| Extraordinary item                                                                 |   |                             | (0.03   | ) |   | – |   |   | – |   |   | – |   |   | – |   |
| Net income (loss) applicable to common stockholders                                |   | $                                | 3.07    |   | $ | (6.11 | ) | $ | (1.10 | ) | $ | (0.64 | ) | $ | (0.97 | ) |
|                                                                               |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of common shares outstanding  used in basic calculations   |   | 49,501,885                       |    | 38,491,044 |   | 21,671,076 |   | 13,155,183 |   | 12,011,083 |   |
|                                                                               |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted income/(loss) per common share before  extraordinary item                  |   | $                                | 2.53    |   | $ | (6.11 | ) | $ | (1.10 | ) | $ | (0.64 | ) | $ | (0.97 | ) |
| Extraordinary item                                                                 |   |                             | (0.02   | ) |   | – |   |   | – |   |   | – |   |   | – |   |
| Net income (loss) applicable to common stockholders                                |   | $                                | 2.51    |   | $ | (6.11 | ) | $ | (1.10 | ) | $ | (0.64 | ) | $ | (0.97 | ) |
|                                                                               |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of common shares outstanding  used in diluted calculations |   | 60,719,648                       |    | 38,491,044 |   | 21,671,076 |   | 13,155,183 |   | 12,011,083 |   |
|                                                                               |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet Data:                                                                |   |                             |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                          |   | $                                | 122,488 |   | $ | 9,413 |   | $ | 5,198 |   | $ | 658 |   | $ | 6,521 |   |
| Working capital/(deficiency)                                                       |   | 115,684                          |    | 9,151 |   | 3,007 |   | (1,062 | ) | 5,094 |   |
| Total assets                                                                       |   | 235,509                          |    | 28,984 |   | 13,616 |   | 7,902 |   | 11,693 |   |
| Long-term debt (including current portion)                                         |   | —                           |    | 4,804 |   | 4,315 |   | — |   | — |   |
|                                                                                    |        |                                  |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

12

----

                The historical financialinformation has been restated to include the accounts and results of operationsof Bottle Rocket Inc. which was acquired on August 17, 2000 in atransaction accounted for under the pooling of interests method as described inNote 3 in the consolidated financial statements.  Inaddition, the historical financial information has been restated to account forcertain variable plan stock options as compensation cost.  See also Note 20 to the consolidated financialstatements.

 

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*                You should read the followingdiscussion together with our consolidated financial statements and relatednotes included elsewhere and incorporated by reference. The results discussedbelow are not necessarily indicative of the results to be expected in anyfuture periods. To the extent that the information presented in this discussionaddresses financial projections, information or expectations about our productsor markets or otherwise makes statements about future events, such statementsare forward–looking and are subject to a number of risks anduncertainties that could cause actual results to differ materially from thestatements made. See “Special Note Regarding Forward–Looking Statements”for further information about forward–looking statements**.** Management’s Discussion and Analysis ofFinancial Condition and Results of Operations presented below gives effect tothe restatement of our previously reported results of operations for theseperiods.  See Note 20 to theconsolidated financial statements for a discussion of this matter.*

 

**Overview**

 

                We are a digital media companythat provides technical and creative services, tools and proprietaryapplications for digital television and enhanced media. We have two operatingbusiness segments, which we call Digital TV and Enhanced Media.

 

                We have developed a range ofservices, products and proprietary technologies for each of these business segments.Our Digital TV technologies enable television programmers and advertisers tocreate individualized programming for digital television transmission systems.We believe that our Digital TV technologies are unique in providing targeting,interactivity and accountability for television commercials, and in givingviewers the ability to instantly customize their viewing experiences for a widevariety of programming applications. Our Enhanced Media technologies allow bothfor the enhancement of video and audio content, including standard TVprogramming, with Web-based information and interactivity, and for the deliveryof games through the Internet. For the Enhanced Media market, we are a leadingprovider of technology and services that synchronize the delivery of televisionprogramming and Internet content.

 

                We believe that the newapplications enabled by the expansion of digital TV transmission systems andTV/Internet convergence platforms will revolutionize television as we know itby turning passive viewing into an interactive experience. Digital andconvergence technology will allow television distributors, advertisers andprogrammers to bring interactivity to a mass audience. We believe that ourproprietary technologies, tools, applications, and ability to deliver technicaland creative services uniquely position us to capitalize on this anticipateddigital television revolution.

 

                To assist in our development ofACTV as a full-service digital media company, we received strategic investmentsfrom Liberty Digital Inc., our largest shareholder, and Motorola BroadbandCommunications Sector.

 

 

13

----

**RESULTS OF OPERATIONS**

 

 

**Comparison of Fiscal Year EndedDecember 31, 2000 and December 31, 1999**

 

*Revenues.*  Revenues increased 176% to $8.0 millionfor the year ended December 31, 2000, from $2.9 million for the yearended December 31, 1999. The increase is the result of increasing revenuesfrom our Enhanced Media products.

 

*OperatingExpenses.*  Operatingexpenses for the year ended December 31, 2000 were $13.1 million,compared with $5.6 million for the year ended December 31, 1999, anincrease of $7.5 million. The increase was in part due to the developmentof our Digital Television business, which is not yet producing revenue, alongwith increased costs associated with our Enhanced Media operations.

 

*Selling andAdministrative Costs.*  Sellingand administrative expenses for year ended December 31, 2000 were$33.4 million, compared with $19.2 million for the year ended December 31,1999, an increase of $14.2 million. The increase in costs was attributableto the development of the sales, marketing and engineering organizations forDigital Adco, increased investment in management infrastructure, and growth in corporateexpenses. Selling and administrative expenses for 2000 also includes$6.9 million of deferred compensation expense, of which $4.6 millionwas non-cash.

 

*StockAppreciation Rights.*  There were nostock appreciation rights costs in 2000 as the plan was terminated.  There were approximately $2.0 millionstock appreciation rights costs in 1999.

 

*Stock-BasedCompensation.*  Stock-basedcompensation resulted in a credit for the year ended December 31, 2000 of$186.7 million, as compared with an expense of $208.3 million for the yearended December 31, 1999.  The Companyrecords a charge or a credit to stock-based compensation expense based onincreases or decreases in the market value of the Company’s common stock inexcess of the exercise price of certain employee options, which are subject tovariable option accounting treatment. The Company recorded a credit in deferred stock-based compensation for theyear ended December 31, 2000 as the market price of the Company’s common stockdeclined in 2000 as compared to its value as of December 31, 1999.  Conversely, the Company recorded a charge tostock-based compensation for the year ended December 31, 1999 as the marketprice of the Company’s common stock increased in 1999 as compared to its valueas of December 31, 1998.

 

*Depreciationand Amortization.*  Depreciation andamortization expense increased $1.8 million for the year endedDecember 31, 2000, to $3.9 million, from $2.1 million during thesame period of 1999, due primarily to our increasing investment in patents, softwaredevelopment, and equipment.

 

*Interest(Expense)/Income.*  Interest income,net of interest expense, for the year ended December 31, 2000 was$7.4 million, compared with net interest expense of $0.6 million forthe year ended December 31, 1999. The increase was the result ofsignificantly higher cash balances resulting from our February 2000follow-on offering. We incurred interest expense for 1999 of $1.0 million,compared to $0.3 million for 2000. Interest expense for 1999 and 2000relates to the $5 million original face value notes issued by a subsidiaryof ours in January 1998; the notes were retired on April 3, 2000.

 

*MinorityInterest.*  The minorityinterest benefit for the year ended December 31, 2000 was$1.7 million, compared with expense of $588 in 1999. The benefit isattributable to the minority interest held by others in Digital Adco, which wasformed in November 1999.

 

*ExtraordinaryItem.*  We recorded an extraordinarychange in 2000 of $1.4 million, resulting from the early extinguishment of$5.0 million notes issued in January 1998.

 

*NetIncome/(Loss)Applicable to Common Stockholders.* For the year ended December 31, 2000, our net income applicable tocommon stockholders after extraordinary loss was $152.1 million, or $3.07 perbasic share and $2.51 per diluted share respectively, compared with a net lossapplicable to common stockholders of $235.4 million, or $6.11 per basic anddiluted share, for the year ended December 31, 1999. The primarydifference results from significant non-cash stock-based compensation expenserecorded in 1999 and a reduction of such expense in 2000.

 

14

----

**Comparison of Fiscal Year EndedDecember 31, 1999 and December 31, 1998**

 

*Revenues.*  Revenues increased 79% to $2.9 millionfor the year ended December 31, 1999, from $1.6 million for the yearended December 31, 1998, due to an increase in Enhanced Media sales.Substantially all of our revenues in 1998 and the majority of our revenues in1999 were derived from sales of HyperTV and Bottle Rocket software, servicesand related computer hardware.

 

*OperatingExpenses.*  Operatingexpenses were $5.6 million compared with $3.1 million, an increase of$2.5 million.  The increase inexpenses is directly related to the increased Enhanced Media revenue.

 

*Selling andAdministrative Expenses.*  Sellingand administrative expenses increased 77% to $19.2 million for the yearended December 31, 1999, from $10.8 million for the year endedDecember 31, 1998, due chiefly to non-cash employee compensation, paid inthe form of stock and to greater expenses related to HyperTV.

 

*StockAppreciation Rights.*  Stockappreciation rights costs were approximately $2.0 million for each of theyears ended December 31, 1999 and 1998.

 

*Stock-BasedCompensation.*  Stock-basedcompensation expense for year ended December 31, 1999 was $208.3 million,compared with  expense of $1.3 millionfor the year ended December 31, 1998. The Company records a charge or a creditto stock-based compensation expense based on increases or decreases in themarket value of the Company’s common stock in excess of the exercise price ofcertain employee options, which are subject to variable option accountingtreatment. TheCompany recorded a charge to stock-based compensation for the year endedDecember 31, 1999 as the market price of the Company’s common stock increasedin 1999 as compared to its value as of December 31, 1998.

 

*Depreciationand Amortization.*  We continue toinnovate in the areas of software development and intellectual properties.Accordingly, our depreciation and amortization expense increased approximately$0.6 million, or 37%.

 

*Interest(Expense) Income-Net.*  Interestexpense increased 12% to $1.0 million for the year ended December 31,1999, from $0.9 million for the year ended December 31, 1998.Interest expense is related to the $5.0 million notes issued inJanuary 1998 by one of our subsidiaries. We chose to pay the interest dueon the notes on June 30, 1998 and December 31, 1998 in kind ratherthan in cash. Interest income increased 145% to $0.5 million for the yearended December 31, 1999, from $.2 million for the year endedDecember 31, 1998. The increase was due to higher average cash balances in1999.

 

*MinorityInterest*.  For the year ended December 31, 1999 a lossof $588 was attributable to the minority interest held by others in Digital Adco formed in November 1999. For the year endedDecember 31, 1998, we recorded $5.4 million for dividends and accretion onsubsidiary convertible preferred stock issuances, which were accounted for as aminority interest. All dividend payments were made in our common stock. In1998, the subsidiary convertible preferred stock was redeemed in full.

 

*Preferred StockDividend and Accretion.*  For eachof the years ended December 31, 1999 and 1998, we paid $0.5 millionin preferred stock dividends, related to our Series B preferred stock. TheSeries B preferred stock was issued in November 1998 and was redeemedin full in May 1999.

 

*Net LossApplicable to Common Stockholders.* Net loss applicable to common stockholders was $235.4 million, or$6.11 per basic and diluted share, for the year ended December 31, 1999,compared to $23.8 million, or $1.10 per basic per basic and diluted share,for the year ended December 31, 1998.

 

15

----

**Liquidity and Capital Resources.**

 

                Since our inception, we have notgenerated revenues sufficient to fund our operations, and have incurredoperating losses. Through December 31, 2000, we had an accumulated deficitof $161.7 million. Our cash position on December 31, 2000 was$122.5 million, compared with $9.4 million on December 31, 1999.

 

*Net Cash UsedIn Operating Activities.*  Duringthe year ended December 31, 2000, we used cash of $29.0 million foroperations, compared with $15.4 million for the year endedDecember 31, 1999.  The increase innet cash used by operating activities principally relates to higher operatinglosses and increased working capital uses.

 

*Net Cash UsedIn Investing Activities and Capital Expenditures.*  For the year ended December 31, 2000,we used cash for investing activities of $17.1 million, compared with$12.0 million, for year ended December 31, 1999.  The increase in cash used in investingactivities is due in part to $3.8 million of strategic equity investments,and increased capital expenditures for the development of interactive TVproducts, and property and equipment.

 

*Net CashProvided By Financing Activities.* We have and continue to fund our cash requirements from the net proceedsof a public, follow-on offering completed on February 3, 2000. Through agroup of underwriters, we sold a total of 4.6 million common shares,resulting in net proceeds of $129.4 million. In addition, onMarch 27, 2000, Liberty Digital, Inc. invested an additional$20 million in us by exercising a warrant granted in March 1999, andOpenTV invested $10 million in our Digital ADCO subsidiary.

 

**Impact ofInflation**

 

                Inflation has not had anysignificant effect on our operating costs.

* *

**NewAccounting Pronouncements**

 

                Statement of Financial Accounting Standards("SFAS") No. 133 "Accounting for Derivative Instruments andHedging Activities" is effective for all fiscal years beginning after June15, 2000. SFAS 133 as amended, establishes accounting and reporting standardsfor derivative instruments. Under SFAS 133, certain contracts that were notformerly considered derivatives may now meet the definition of a derivative. Wewill adopt SFAS 133 effective January 1, 2001. ACTV's investment in LibertyLivewire Corporation ("Livewire"), a publicly traded company, willthen be accounted for at fair value, resulting in a non-cash, cumulative effectof a change in accounting principle of approximately $59.8 million in 2001.This investment will be marked to market prospectively on a quarterly basis andsuch changes in the fair value of the Livewire investment will be recorded inthe results of our operations, which may cause volatility in earnings in futureyears.

 

**Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

                The Company’s interest income isaffected by changes in the general level of U.S. interest rates. Changes inU.S. interest rates could affect the interest earned on the Company’s cashequivalents and investments. Currently, changes in U.S. interest rates wouldnot have a material effect on the interest earned on the Company’s cashequivalents and investments. A majority of these cash equivalents andinvestments earn a fixed rate of interest while the remaining portion earnsinterest at a variable rate. The Company does not anticipate that exposure tointerest rate market risk will have a material impact on the Company due to thenature of the Company’s investments.

 

                During April 2000, theCompany received a warrant to acquire 2,500,000 shares of Livewire. The warrantbecomes exercisable at the rate of 500,000 shares per year, commencing onApril 13, 2001, includes certain registration rights and may be exerciseduntil March 31, 2015. The warrant is not transferable, except in certaincircumstances. The Company estimated the value of the warrant to be $76,016,175at the date it was received, using the Black–Scholes pricing model, witha risk free rate of 6.5%, a volatility of 80% and assuming no cash dividends.The estimated value of the warrant at December 31, 2000 was $17,300,000,using the same assumptions. The Company expects the value of the warrant tofluctuate based on the underlying stock price of Livewire.

 

                The Company records stock-basedcompensation expense based on increases or decreases in the market price of theCompany's common stock above the exercise price of certain employee options,which are subject to variable option accounting treatment. To the extent thatthe Company has a deferred stock-based compensation expense obligation at thebeginning of a given reporting period, the Company will recognize a reductionin stock-based compensation expense related to unexercised variable options forthat period based on a reduction of the market price for the Company’s stock atthe end of the period.  The deferredobligation will increase as the market price for the Company’s common stockincreases at the end of a reporting period.

 

**Item 8.  Financial Statements and Supplementary Data**

 

                The Financial Statements arelisted under Item 14 in this report.

 

**Item 9.  Change in and Disagreements with Accountantson Accounting and Financial Disclosure**

 

                None.

 

16

----

**PART III**

 

**Item 10.  MANAGEMENT**

 

**ExecutiveOfficers and Directors**

 

                We intend to file with theSecurities and Exchange Commission, within 120 days after December 31, 2000, adefinitive proxy statement pertaining to our annual meeting of stockholders tobe held in June, 2001. Information regarding our directors and executiveofficers will appear under the caption “Election of Directors” in the proxystatement and is incorporated in this report by reference.

 

**Item 11.  EXECUTIVE COMPENSATION**

 

                Information regarding executivecompensation will appear under the caption “Executive Compensation” in theproxy statement and is incorporated in this report by reference.

 

**Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

                Information regarding securityownership of certain beneficial owners and management will appear under thecaption “Ownership of Securities” in the proxy statement and is incorporated inthis report by reference.

 

**Item 13.  CERTAIN TRANSACTIONS**

 

                Information regarding certaintransactions will appear under the caption “Certain Transactions” in the proxystatement and is incorporated in this report by reference.

 

 

 

 

 

 

 

 

 

**PART IV**

 

**Item 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K:**

 

                (a)1.  FINANCIAL STATEMENTS:

 

                                                                See the Consolidated FinancialStatements beginning on Page F-1 hereafter, which is incorporated by reference.

 

17

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Board of Directors andStockholders of ACTV, Inc.:

 

                We have audited the accompanyingconsolidated balance sheets of ACTV, Inc. and subsidiaries (“the Company”)as of December 31, 2000 and 1999 and the related consolidated statementsof operations, stockholders’ equity(deficiency) and cash flows for each of thethree years in the period ended December 31, 2000. Our audits also includedthe financial statement schedule listed in the index at Item 14 (a)(2). Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.

 

                We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

                In our opinion, suchconsolidated financial statements present fairly, in all material respects, theconsolidated financial position of the Company as of December 31, 2000 and1999 and the results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2000 in conformity with accountingprinciples generally accepted in the United States of America. Also, in ouropinion, the financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

Asdiscussed in Note 20, the accompanying consolidated financial statements havebeen restated.

 

DELOITTE & TOUCHE LLP

 

 

March 2,2001

(March 9,2001, as to Note 18; March 28, 2002, as to Note 20)

New York, New York

 

F-1

----

 

**ACTV, INC.AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (As Restated — See Note 20)**

 
|                                                                                                                                                   |   | **December 31,** |        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                                                                   |   | **2000**         |        | **1999** |   |
| **ASSETS**                                                                                                                                             |   |             |        |   |   |
| Current assets:                                                                                                                                        |   |             |        |   |   |
| Cash and cash equivalents                                                                                                                              |   | $                | 122,488,041 |   | $ | 9,413,170 |   |
| Accounts receivable — net                                                                                                                         |   | 1,182,376        |        | 1,469,164 |   |
| Other                                                                                                                                                  |   | 3,758,935        |        | 1,133,414 |   |
|                                                                                                                                                   |   |             |        |   |   |
| Total current assets                                                                                                                                   |   | 127,429,352      |        | 12,015,748 |   |
| Property and equipment-net                                                                                                                             |   | 12,628,232       |        | 3,770,195 |   |
| Other assets:                                                                                                                                          |   |             |        |   |   |
| Investment in warrant                                                                                                                                  |   | 76,016,175       |        | — |   |
| Investments-other                                                                                                                                      |   | 3,250,000        |        | 250,000 |   |
| Patents and patents pending                                                                                                                            |   | 8,053,642        |        | 8,142,928 |   |
| Software development costs                                                                                                                             |   | 3,328,101        |        | 2,183,950 |   |
| Goodwill                                                                                                                                               |   | 1,362,072        |        | 1,788,444 |   |
| Other                                                                                                                                                  |   | 3,441,006        |        | 833,113 |   |
|                                                                                                                                                   |   |             |        |   |   |
| Total other assets                                                                                                                                     |   | 95,450,996       |        | 13,198,435 |   |
|                                                                                                                                                   |   |             |        |   |   |
|                                                                                                                                                   |   | $                | 235,508,580 |   | $ | 28,984,378 |   |
|                                                                                                                                                   |   |             |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                          |   |             |        |   |   |
| Current liabilities:                                                                                                                                   |   |             |        |   |   |
| Accounts payable and accrued expenses                                                                                                                  |   | $                | 7,712,857   |   | $ | 1,967,164 |   |
| Deferred revenue                                                                                                                                       |   | 4,032,776        |        | 897,990 |   |
|                                                                                                                                                   |   |             |        |   |   |
| Total current liabilities                                                                                                                              |   | 11,745,633       |        | 2,865,154 |   |
| Long-term note payable                                                                                                                                 |   | —           |        | 4,804,342 |   |
| Deferred revenue                                                                                                                                       |   | 70,586,450       |        | — |   |
| Minority interest                                                                                                                                      |   | 13,307,131       |        | 2,000,593 |   |
|                                                                                                                                                   |   |             |        |   |   |
| Stockholders’ equity:                                                                                                                             |   |             |        |   |   |
| Common stock, $.10 par value, 200,000,000 shares  authorized: issued and outstanding 51,228,154 at December 31, 2000,  42,440,032 at December 31, 1999 |   | 5,122,816        |        | 4,244,004 |   |
| Stockholder loans                                                                                                                                      |   | (643,606         | )           | (456,016 | ) |
| Additional paid-in capital                                                                                                                             |   | 297,073,713      |        | 326,589,837 |   |
| Accumulated deficit                                                                                                                                    |   | (161,683,557     | )           | (311,063,536 | ) |
|                                                                                                                                                   |   |             |        |   |   |
| Total stockholders’ equity                                                                                                                        |   | 139,869,366      |        | 19,314,289 |   |
|                                                                                                                                                   |   | $                | 235,508,580 |   | $ | 28,984,378 |   |

 

See notes to consolidatedfinancial statements

 

F-2

----

**ACTV, INC. AND SUBSIDIARIES CONSOLIDATEDSTATEMENTS OF OPERATIONS (As Restated — See Note 20)**

 
|                                                                                                    |   | **Years ended December 31,** |        |
|---------------------------------------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                                                    |   | **2000**                     |        | **1999** |   | **1998** |   |
| Revenue                                                                                                 |   | $                            | 8,016,453   |   | $ | 2,909,642 |   | $ | 1,625,139 |   |
| Costs and expenses:                                                                                     |   |                         |        |   |   |   |   |
| Operating expenses                                                                                      |   | 13,060,176                   |        | 5,588,090 |   | 3,116,573 |   |
| Selling and administrative                                                                              |   | 33,403,906                   |        | 19,206,036 |   | 10,843,984 |   |
| Depreciation and amortization                                                                           |   | 3,907,631                    |        | 2,118,096 |   | 1,557,717 |   |
| Stock appreciation rights                                                                               |   | —                       |        | 1,950,330 |   | 2,000,062 |   |
| Stock-based compensation (income)/expense                                                               |   | (186,673,365                 | )           | 208,343,386 |   | 1,278,189 |   |
| Total costs and expenses/(income)                                                                       |   | (136,301,652                 | )           | 237,205,938 |   | 18,796,525 |   |
|                                                                                                    |   |                         |        |   |   |   |   |
| Income /(loss) from operations                                                                          |   | 144,318,105                  |        | (234,296,296 | ) | (17,171,386 | ) |
|                                                                                                    |   |                         |        |   |   |   |   |
| Interest income                                                                                         |   | 7,726,929                    |        | 465,840 |   | 189,928 |   |
| Interest (expense)                                                                                      |   | (284,619                     | )           | (1,044,227 | ) | (932,247 | ) |
| Interest income/(expense) —net                                                                     |   | 7,442,310                    |        | (578,387 | ) | (742,319 | ) |
|                                                                                                    |   |                         |        |   |   |   |   |
| Income/(loss) before minority interest, preferred stock  dividend and accretion and extraordinary items |   | 151,760,415                  |        | (234,874,683 | ) | (17,913,705 | ) |
| Minority interest-subsidiary preferred stock dividend  and accretion                                    |   | —                       |        | — |   | (5,428,638 | )  |
| Minority interest-subsidiary                                                                            |   | 1,743,357                    |        | (588 | ) | — |   |
|                                                                                                    |   |                         |        |   |   |   |   |
| Income/(loss) before extraordinary item                                                                 |   | 153,503,772                  |        | (234,875,271 | ) | (23,342,343 | ) |
|                                                                                                    |   |                         |        |   |   |   |   |
| Extraordinary loss on early extinguishment of debt                                                      |   | (1,411,139                   | )           | — |   | — |   |
|                                                                                                    |   |                         |        |   |   |   |   |
| Net income/(loss)                                                                                       |   | 152,092,633                  |        | (234,875,271 | ) | (23,342,343 | ) |
|                                                                                                    |   |                         |        |   |   |   |   |
| Preferred stock dividends and accretion                                                                 |   | —                       |        | (494,431 | )  | (479,173 | ) |
|                                                                                                    |   |                         |        |   |   |   |   |
| Net income/(loss) applicable to common stockholders                                                     |   | $                            | 152,092,633 |   | $ | (235,369,702 | ) | $ | (23,821,516 | ) |
|                                                                                                    |   |                         |        |   |   |   |   |
| Net income/(loss) per share:                                                                            |   |                         |        |   |   |   |   |
|                                                                                                    |   |                         |        |   |   |   |   |
| Basic per share amounts                                                                                 |   |                         |        |   |   |   |   |
|                                                                                                    |   |                         |        |   |   |   |   |
| Before extraordinary item                                                                               |   | $                            | 3.10        |   | $ | (6.11 | ) | $ | (1.10 | ) |
| Extraordinary item                                                                                      |   |                         | (0.03       | ) |   | — |   |   | — |   |
| Net income/(loss) applicable to common stockholders                                                     |   | 3.07                         |        | (6.11 | ) | (1.10 | ) |
|                                                                                                    |   |                         |        |   |   |   |   |
| Diluted per share amounts                                                                               |   |                         |        |   |   |   |   |
|                                                                                                    |   |                         |        |   |   |   |   |
| Before extraordinary item                                                                               |   | $                            | 2.53        |   | $ | (6.11 | ) | $ | (1.10 | ) |
| Extraordinary item                                                                                      |   | (0.02                        | )           | — |   | — |   |
| Net income/(loss) applicable to common stockholders                                                     |   | 2.51                         |        | (6.11 | ) | (1.10 | ) |
|                                                                                                    |   |                         |        |   |   |   |   |
| Weighted average number of common shares used in basic  calculations                                    |   | 49,501,885                   |        | 38,491,044 |   | 21,671,076 |   |
| Weight average number of common shares used in diluted  calculations                                    |   | 60,719,648                   |        | 38,491,044 |   | 21,671,076 |   |
|                                                                                                         |        |                              |             |  |  |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements

 

F-3

----

 

**ACTV, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (As Restated — See Note20)**

 
|                                                                        |   | **Years ended December 31,** |        |
|-----------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                        |   | **2000**                     |        | **1999** |   | **1998** |   |
| Cash flows from operating activities:                                       |   |                         |        |   |   |   |   |
| Net income (loss)                                                           |   | $                            | 152,092,633 |   | $ | (234,875,271 | ) | $ | (17,913,705 | ) |
| Adjustments to reconcile net income (loss) to net cash  used in operations: |   |                         |        |   |   |   |   |
| Depreciation and amortization                                               |   | 3,907,631                    |        | 2,118,096 |   | 1,557,717 |   |
| Deferred compensation from stock appreciation rights                        |   | 306,000                      |        | 1,950,330 |   | 2,000,062 |   |
| Deferred stock-based compensation                                           |   | (186,673,365                 | )           | 208,343,386 |   | 1,278,189 |   |
| Deferred revenue                                                            |   | (2,294,939                   | )           | 825,788 |   | 10,027 |   |
| Amortization of deferred expenses related to debt  financing                |   | —                       |        | 864,147 |   | 241,565 |   |
| Minority interest                                                           |   | (1,743,357                   | )           | 588 |   |   |   |
| Write-down of investment                                                    |   | 750,000                      |        | — |   | — |   |
| Common stock issued in lieu of cash payment                                 |   | 4,560,000                    |        | 6,383,560 |   | 2,016,023 |   |
| Changes in assets and liabilities:                                          |   |                         |        |   |   |   |   |
| Accounts receivable                                                         |   | 286,788                      |        | (933,501 | ) | (218,719 | ) |
| Other assets                                                                |   | (5,964,251                   | )           | (615,789 | ) | (180,161 | ) |
| Accounts payable and accrued expenses                                       |   | 5,745,693                    |        | 537,249 |   | (773,776 | ) |
| Net cash used in operating activities                                       |   | (29,027,167                  | )           | (15,401,417 | ) | (11,982,778 | ) |
| Cash flows from investing activities:                                       |   |                         |        |   |   |   |   |
| Investments in patents                                                      |   | (500,726                     | )           | (7,515,343 | ) | (598,671 | ) |
| Investment in property and equipment                                        |   | (10,938,456                  | )           | (2,366,917 | ) | (613,047 | ) |
| Investment in software and development costs                                |   | (1,954,979                   | )           | (1,438,654 | ) | (797,677 | ) |
| Investments — other                                                    |   | (3,750,000                   | )           | — |   | — |   |
| Net cash used in investing activities                                       |   | (17,144,161                  | )           | (11,320,914 | ) | (2,009,395 | ) |
| Cash flows from financing activities:                                       |   |                         |        |   |   |   |   |
| Net proceeds from debt issuance                                             |   | —                       |        | — |   | 4,612,990 |   |
| Retirement of debt                                                          |   | (4,567,095                   | )           | (174,732 | ) | — |   |
| Net proceeds from put warrant issuance                                      |   | —                       |        | — |   | 1,371,624 |   |
| Redemption of preferred stock                                               |   | —                       |        | (5,198,341 | ) | (565,759 | ) |
| Net proceeds from subsidiary equity transactions                            |   | 13,049,895                   |        | 2,000,592 |   | — |   |
| Net proceeds from equity financing                                          |   | 150,763,399                  |        | 34,309,731 |   | 13,113,192 |   |
| Net cash provided by financing activities.                                  |   | 159,246,199                  |        | 30,937,250 |   | 18,532,047 |   |
|                                                                        |   |                         |        |   |   |   |   |
| Net increase in cash and cash equivalents                                   |   | 113,074,871                  |        | 4,214,919 |   | 4,539,874 |   |
| Cash and cash equivalents, beginning of period                              |   | 9,413,170                    |        | 5,198,251 |   | 658,377 |   |
| Cash and cash equivalents, end of period                                    |   | $                            | 122,488,041 |   | $ | 9,413,170 |   | $ | 5,198,251 |   |

 

See notes to consolidated financial statements

 

 

F-4

----

 

**ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY (DEFICIENCY)**

 
|                                                                                                      |   | **Common Stock** |   |       |      | **Preferred Series A** |   |       |   | **Preferred Series B** |   |       |   |                     |        |                                        |   |                    |        |         |
|-----------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------|-----------|-----------------------------|--------|------------|--------|-----------------------------|--------|------------|--------|--------------------------|-------------|---------------------------------------------|--------|-------------------------|-------------|--------------|
|                                                                                                      |   | **Shares**       |   | **Amount** |      | **Shares**                  |   | **Amount** |   | **Shares**                  |   | **Amount** |   | **Stockholder****Loans** |        | **Additional****Paid–in–Capital** |   | **Accumulated Deficit** |        | **Total**    |   |
|                                                                                                      |   |             |   |       |      |                        |   |       |   |                        |   |       |   | (as  Restated)           |        | (as Restated)                               |   | (as Restated)           |        |         |   |
| Balances December 31, 1997 —  as previously reported                                                 |   | 14,886,646       |   | $          | 1,488,666 |                        | 86,200 |       | $      | 8,620                       |   | —     |   | $                        | —      |                                        | $      | (199,900                | )           | $            | 48,488,401 |   | $ | (51,352,388 | ) | $ | (1,566,601 | ) |
|                                                                                                      |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        |                                        |   |                    |        |         |   |
| Prior period adjustments                                                                                  |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        | 519,930                                     |   | (519,930                | )           | —       | ) |
| Balances at December 31, 1997  — as restated                                                         |   | 14,886,646       |   | $          | 1,488,666 |                        | 86,200 |       | $      | 8,620                       |   | —     |   | $                        | —      |                                        | $      | (199,900                | )           | 49,008,331   |   | $ | (51,872,318 | ) | $ | (1,566,601 | ) |
| Issuance of shares in  connection with financings                                                         |   | 6,458,332        |   | 645,833    |      |                        |   |       |   |                        |   |       |   |                     |        | 11,287,813                                  |   |                    |        | 11,933,646   |   |
| Issuance of Series B  preferred stock                                                                     |   |             |   |       |      |                        |   |       |   | 5,018                       |   | 2,805,961  |   |                     |        | 2,527,723                                   |   |                    |        | 5,333,684    |   |
| Issuance of shares for  services                                                                          |   | 373,592          |   | 37,359     |      |                        |   |       |   |                        |   |       |   |                     |        | 508,083                                     |   |                    |        | 545,442      |   |
| Issuance of shares in  connection with exchange of preferred stock                                        |   | 5,857,406        |   | 585,741    |      | (29,900                     | )      | (2,990     | )      |                        |   |       |   |                     |        | 2,535,660                                   |   |                    |        | 3,118,411    |   |
| Adjustment to 

deferred stock compensation                                                               |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     | 1,278,189   |                                        |   |                    | 1,278,189   |         |
| Issuance of shares in  connection with exercise of stock options                                          |   | 1,662,452        |   | 166,245    |      |                        |   |       |   |                        |   |       |   |                     |        | 2,282,323                                   |   |                    |        | 2,448,568    |   |
| Issuance of warrants and shares  in connection with financing activities                                  |   | 793,066          |   | 79,307     |      |                        |   |       |   |                        |   |       |   |                     |        | 5,086,153                                   |   |                    |        | 5,165,460    |   |
| Net loss (as restated)                                                                                    |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        |                                        |   | (23,342,343             | )           | (23,342,343  | ) |
| Preferred dividends                                                                                       |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        |                                        |   | (479,173                | )           | (479,173     | ) |
| Balances December 31, 1998                                                                                |   | 30,031,494       |   | $          | 3,003,151 |                        | 56,300 |       | $      | 5,630                       |   | 5,018      |   | $                        | 2,805,961   |                                        | $      | (199,900                | )           | $            | 74,514,275 |   | $ | (75,693,834 | ) | $ | 4,435,283 |   |
| Issuance of common shares                                                                                 |   | 4,059,783        |   | 405,978    |      |                        |   |       |   |                        |   |       |   |                     |        | 22,611,560                                  |   |                    |        | 23,017,538   |   |
| Issuance of shares for services                                                                           |   | 931,294          |   | 93,129     |      |                        |   |       |   |                        |   |       |   |                     |        | 10,696,587                                  |   |                    |        | 10,789,716   |   |
| Issuance of shares in  connection with exchange of preferred stock                                        |   | 1,061,690        |   | 106,169    |      | (56,300                     | )      | (5,630     | )      |                        |   |       |   |                     |        |                                        |   |                    |        | 100,539      |   |
| Issuance of shares in  connection with exercise of stock options, stock appreciation rights and  warrants |   | 6,355,771        |   | 635,577    |      |                        |   |       |   |                        |   |       |   |                     |        | 12,816,409                                  |   |                    |        | 13,451,986   |   |
| Adjustment to

deferred stock 

compensation                                                              |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     | 208,343,386 |                                        |   |                    | 208,343,386 |         |
| Issuance of shareholder loans                                                                             |   |             |   |       |      |                        |   |       |   |                        |   |       |   | (456,016                 | )           |                                        |   |                    |        | (456,016     | ) |
| Preferred stock redemption                                                                                |   |             |   |       |      |                        |   |       |   | (5,018                      | )      | (2,805,961 | )      |                     |        | (2,392,380                                  | )      |                    |        | (5,198,341   | ) |
| Payment of stockholder loans                                                                              |   |             |   |       |      |                        |   |       |   |                        |   |       |   | 199,900                  |        |                                        |   |                    |        | 199,900      |   |
| Net loss (as restated)                                                                                    |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        |                                        |   | (234,875,271            | )           | (234,875,271 | ) |
| Preferred stock dividends and  accretion                                                                  |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        |                                        |   | (494,431                | )           | (494,431     | ) |
| Balances December 31, 1999                                                                                |   | 42,440,032       |   | $          | 4,244,004 |                        | — |       | $      | —                      |   | —     |   | $                        | —      |                                        | $      | (456,016                | )           | $            | 326,589,837 |   | $ | (311,063,536 | ) | $ | 19,314,289 |   |
|                                                                                                      |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        |                                        |   |                    |        |         |   |
| Issuance of shares in  connection with public offering                                                    |   | 4,600,000        |   | 460,000    |      |                        |   |       |   |                        |   |       |   |                     |        | 128,909,468                                 |   |                    |        | 129,369,468  |   |
| Issuance of shares for  services                                                                          |   | 947,000          |   | 94,700     |      |                        |   |       |   |                        |   |       |   |                     |        | 7,617,788                                   |   |                    |        | 7,712,488    |   |
| Issuance of shares in  connection with exercise of stock options & warrants                           |   | 3,299,598        |   | 329,960    |      |                        |   |       |   |                        |   |       |   |                     |        | 20,937,621                                  |   |                    |        | 21,267,581   |   |
| Adjustment to deferred stock  compensation                                                                |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        | (186,673,365                                | )      |                    |        | (186,673,365 | ) |
| Issuance of shareholder loan                                                                              |   |             |   |       |      |                        |   |       |   |                        |   |       |   | (187,590                 | )           |                                        |   |                    |        | (187,590     | ) |
| Retirement of common stock                                                                                |   | (58,476          | )      | (5,848     | )         |                        |   |       |   |                        |   |       |   |                     |        | (307,636                                    | )      | (2,712,654              | )           | (3,026,138   | ) |
| Net  income (as restated)                                                                            |   |             |   |       |      |                        |   |       |   |                        |   |       |   |                     |        |                                        |   | 152,092,633             |        | 152,092,633  |   |
| Balance at December 31, 2000                                                                              |   | 51,228,154       |   | $          | 5,122,816 |                        | — |       | $      | —                      |   | —     |   | $                        | —      |                                        | $      | (643,606                | )           | $            | 297,073,713 |   | $ | (161,683,557 | ) | $ | 139,869,366 |   |
|                                                                                                           |        |                  |        |            |           |                             |        |            |        |                             |        |            |        |                          |             |                                             |        |                         |             |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

** **

**Seenotes to consolidated financial statements**

** **

**F-5**

----

**ACTV, INC.and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the YEARS ENDED DECEMBER 31, 2000, 1999 and 1998**

 

**1. Nature ofOperations**

 

                We are a digital media companythat provides technical and creative services, tools and proprietaryapplications for enhanced media, interactive TV, advertising, and personalized programmingapplications. We have two operating business segments, which we call Digital TVand Enhanced Media.

 

                We have developed proprietarytechnologies for each of these business segments. Our Digital TV technologiesenable television programmers and advertisers to create individualizedprogramming for digital television transmission systems. Our Enhanced Mediatechnologies allow for the enhancement of video and audio content, includingstandard TV programming, with information, interactivity and games deliveredthrough the Internet. We believe that our Digital TV technologies are unique inproviding targeting, interactivity and accountability for televisioncommercials, and in giving viewers the ability to instantly customize theirviewing experiences. For the Enhanced Media market, we are a leading providerof technology and services that synchronize the delivery of televisionprogramming and Internet content. To date, all of our revenues have beengenerated by our Enhanced Media businesses. Revenues from our Digital TVbusinesses will commence in 2001.

 

**2. Organizationand Significant Accounting Policies**

 

*                Principles of Consolidation*—The Company’sconsolidated financial statements include the balances of its operatingsubsidiaries that are more than 50% owned and controlled along with DigitalADCO (“ADCO”), which is a 45.9% subsidiary controlled by the Company. Allsignificant intercompany transactions and account balances are eliminated.

 

*                Property and Equipment*—Property andequipment is recorded at cost and depreciated on the straight-line method overits estimated useful lives (generally 5 years). Depreciation expense forthe years ended December 31, 2000, 1999 and 1998 aggregated $2,080,420,$929,765 and $762,581, respectively.

 

*                Patents and Patents Pending*—The cost of patents,representing patent acquisition costs and legal costs relating to patentspending, is being amortized on a straight-line basis over the estimatedeconomic lives of the respective patents (averaging 10 years), which isless than the statutory life of each patent. The balances at December 31,2000 and 1999, are net of accumulated amortization of $981,248 and $391,236,respectively.

 

*                Software Development Costs*—The Companycapitalizes costs incurred for the development of software products wheneconomic and technological feasibility of such products has been established.Capitalized software costs are amortized on a straight-line basis over theestimated useful lives of the respective products (5 years). Theunamortized balance at December 31, 2000 and 1999 is net of accumulatedamortization of $1,567,435 and $756,607, respectively.

 

*                Cash Equivalents*—The Companyconsiders all highly liquid debt instruments purchased with an originalmaturity of three months or less to be cash equivalents.

 

*                Revenue Recognition*—In businesses wherethe Company is delivering specific services and products, revenues are recordedas the services and products are delivered. Where software licenses are grantedfor a specific period of time, with related content and maintenance contracts,revenue is aggregated and amortized over the life of the license.

 

*                Earnings Per Share*—Basic income(loss) per common share equals net income (loss) divided by the weightedaverage number of shares of the Company’s common stock outstanding during theperiod. Diluted income per share gives effect to the dilutive potential commonshares.  The Company did not considerthe effect of stock options or convertible preferred stock upon the calculationof the loss per common share for the years ended December 31, 1999 and 1998,respectively, as it would be anti-dilutive.

 

                Thefollowing table sets forth the computation of basic and diluted income/(loss)per share:

 
|                                                 |   | **Years ended December 31,** |        |
|------------------------------------------------------|--------|------------------------------|-------------|
|                                                 |   | **2000**                     |        | **1999** |   | **1998** |   |
|                                                 |   |                         |        |   |   |   |   |
| Numerator:                                           |   |                         |        |   |   |   |   |
| Income/(loss) before extraordinary item              |   | $                            | 153,503,772 |   | $ | (234,875,271 | ) | (23,342,343 | ) |
| Extraordinary loss on early extinguishment of debt   |   | (1,411,139                   | )           | — |   | — |   |
| Preferred stock dividends and accretion              |   | —                       |        | (494,431 | ) | (479,173 | ) |
| Net income/(loss) applicable to common  stockholders |   | $                            | 152,092,633 |   | $ | (235,369,702 | ) | (23,821,516 | ) |
|                                                 |   |                         |        |   |   |   |   |
| Denominator:                                         |   |                         |        |   |   |   |   |
| Basic weighted-average shares outstanding            |   | 49,501,885                   |        | 38,491,044 |   | 21,671,076 |   |
| Weighted-average options outstanding                 |   | 11,217,763                   |        | — |   | — |   |
| Diluted weighted average shares outstanding          |   | 60,719,648                   |        | 38,491,044 |   | 21,671,076 |   |
|                                                 |   |                         |        |   |   |   |   |
| Basic                                                |   |                         |        |   |   |   |   |   |   |   |
| Before extraordinary item                            |   | $                            | 3.10        |   | $ | (6.11 | ) | $ | (1.10 | ) |
| Extraordinary item                                   |   | (0.03                        | )           | — |   | — |   |
| Net income/(loss) applicable to common stockholders  |   | $                            | 3.07        |   | $ | (6.11 | ) | $ | (1.10 | ) |
|                                                 |   |                         |        |   |   |   |   |
| Diluted                                              |   |                         |        |   |   |   |   |
| Before extraordinary item                            |   | $                            | 2.53        |   | $ | (6.11 | ) | $ | (1.10 | ) |
| Extraordinary item                                   |   | (0.02                        | )           | — |   | — |   |
| Net income/(loss) applicable to common stockholders  |   | $                            | 2.51        |   | $ | (6.11 | ) | $ | (1.10 | ) |

 

F-6

----

 

*                Long-Lived Assets andIntangibles*—In accordance with SFAS No. 121, *Accountingfor the Impairment of Long–Lived Assets and for Long-Lived Assets to beDisposed of*, which requires that long-lived assets be reviewed forimpairment whenever events or changes in circumstances indicate that the bookvalue of the asset may not be recoverable, the Company reviews the carryingvalues of its long-lived assets and identifiable intangibles for possibleimpairment. The excess of the purchase cost over the fair value of net assetsacquired in an acquisition (goodwill) is being amortized on a straight-linebasis over a period of 10 years. The Company evaluates the realizabilityof goodwill based upon the expected undiscounted cash flows of the acquiredbusiness. Impairments, if any, will be recognized through a charge tooperations, in the period in which the impairment is deemed to exist. TheCompany does not believe that any long-lived assets and intangibles have beenimpaired. The Company did not record impairment losses for the three yearsended December 31, 2000.

 

*                Stock–Based Compensation*—The Company appliesthe intrinsic–value based method of accounting prescribed by APB OpinionNo. 25, *Accounting for Stock Issued to Employee*”*,* (“APB 25”) and presentsdisclosure of pro forma information required under Statement of FinancialAccounting Standards No. 123 (“SFAS 123), *Accountingfor Stock Based Compensation. *Certainof the Company’s options are subject to variable plan accounting under APB 25which results in the recording of charges or credits to compensation expensefor increases or decreases in the market value of the stock in excess of theprice of certain options and an offsetting entry is recorded to additional paidin capital.   The Company amortizesstock based compensation arising from certain employee stock option grants overthe vesting periods of the related options, generally three years.

 

*                Use of Estimates*—The preparation offinancial statements in conformity with general accepted accounting principlesrequires management to make estimates and assumptions that effect the reportedamount of assets and liabilities and disclosures of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom these estimates.

 

*                Reclassifications*—Certainreclassifications have been made to the prior years financial statements toconform to the current year presentation.

 

*                Recently Issued AccountingPronouncements*—In June 1998, the FASB issued SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities,*(“SFAS 133”), which becomes effective for the Company’s consolidatedfinancial statements for the year beginning January 1, 2001, (as amendedby SFAS No. 137, *Accounting for Derivative Instruments and HedgingActivities–Deferral of the Effective Date of SFAS 133* andSFAS No. 138, *Accounting for Certain Derivative Instruments andHedging Activities*). These statements establish accounting andreporting standards requiring that derivative instruments be recorded in thebalance sheet as either an asset or liability measured at fair value. Thesestatements require that changes in a derivative’s fair value be recognizedcurrently in earnings unless specific hedge accounting criteria are met. Wewill adopt SFAS 133 effective January 1, 2001. ACTV's investment in Livewirewill then be accounted for at fair value, resulting in a non-cash, cumulativeeffect of a change in accounting principle of approximately $59.6 million in2001.

 

**3. Merger andAcquisition Activity**

 

*Acquisition*

 

                On August 17, 2000, theCompany acquired all of the outstanding capital stock of BottleRocket, Inc. (“Bottle Rocket”) in exchange for 272,035 shares of theCompany’s common stock. Bottle Rocket creates online entertainment based onproprietary technology engines for trivia, prediction, simulation, arcade–style,and multi–player games. The acquisition of Bottle Rocket has beenaccounted for under the pooling of interests method of accounting and,accordingly, the Company’s historical consolidated financial statements havebeen restated to include the accounts and results of operations of BottleRocket.

 

                The results of operationspreviously reported by the Company, the results of operations of Bottle Rocketand the combined amounts presented in the accompanying consolidated financialstatements are presented below:

 

 

 

F-7

----

 

|                                       |   | **1999**                     |        | **1998**  |   |
|--------------------------------------------|--------|------------------------------|-------------|-----------|--------|
|                                       |   | **Years ended December 31,** |        |
| Revenues:                                  |   |                         |        |      |   |
| ACTV                                       |   | $                            | 2,117,938   |      | $      | 1,405,838 |   |
| Bottle Rocket                              |   | 791,704                      |        | 219,301   |   |
| Combined                                   |   | $                            | 2,909,642   |      | $      | 1,625,139 |   |
| Net loss applicable to common stockholders |   |                         |        |      |   |
| ACTV                                       |   | $                            | 231,720,996 |      | $      | 22,146,513 |   |
| Bottle Rocket                              |   | 3,648,706                    |        | 1,675,003 |   |
| Combined                                   |   | $                            | 235,369,702 |      | $      | 23,821,516 |   |
|                                            |        |                              |             |           |        |  |  |  |

 

                There were no eliminations orother adjustments to historical financial statements or significantnon-recurring charges as a result of this transaction. The revenues and netloss of Bottle Rocket were $1,469,513 and $1,337,854, respectively, fromJanuary 1, 2000 to August 17, 2000. Bottle Rocket had no operationsprior to 1997.

 

**4. Property and Equipment**

 

                Property and equipment—net atDecember 31, 2000 and 1999 consisted of the following (at cost):

 

|                                           |   | **2000**   |       | **1999**   |   |
|------------------------------------------------|--------|------------|------------|------------|--------|
| Machinery and equipment                        |   | $          | 8,138,082  |       | $      | 5,181,941 |   |
| Office furniture and fixtures                  |   | 3,253,895  |       | 837,207    |   |
| Leasehold improvements                         |   | 5,992,172  |       | 428,132    |   |
|                                           |   |       | 17,384,149 |       |   | 6,447,280 |   |
| Less accumulated depreciation and amortization |   | (4,755,917 | )          | (2,677,085 | )      |
|                                           |   | $          | 12,628,232 |       | $      | 3,770,195 |   |

 

**5.  Financing Activities**

 

*Common StockFinancing*

 

                During the years endedDecember 31, 2000, 1999 and 1998, the Company raised approximately $129.4,$23.0 and $11.9 million, respectively from sales of common stock toprivate institutional investors and approximates $23.0, $3.5 and $2.6 million,respectively, from the exercise of stock options and warrants.

 

                On February 3, 2000, wecompleted a follow-on offering of 4.6 million common shares, including0.6 million common shares to cover the over-allotments of ourunderwriters, Credit Suisse First Boston, Bear Stearns &Co. Inc., Lehman Brothers, and Salomon Smith Barney. The 4.6 milliontotal common shares were priced to the public at $30 per share, for total grossproceeds of $138 million. We paid underwriting discounts and commissionsof $1.80 per share or $8.28 million, resulting in net proceeds of $28.20per share, or approximately $129.7 million

 

                On March 27, 2000 LibertyDigital, Inc. invested an additional $20 million in us, increasingits investment to 16% by exercising a warrant granted in March 1999.

 

F-8

----

 

*Preferred StockFinancing*

 

                During 1996, the Company raisedapproximately $11.0 million net from the proceeds of a private placementof common stock and 5% exchangeable preferred stock issued by the Company’swholly–owned subsidiary. This exchangeable preferred stock wasconvertible into common stock of ACTV, Inc., beginning January 1,1997, at varying discounts to the market price of common stock. Theexchangeable preferred stock was convertible into shares of common stock at adiscounted conversion price. The discount ranged from 14% to a maximum of30.375%. The extent of the beneficial conversion feature was approximately$4.0 million, representing the maximum difference between the discountedconversion price and the prevailing market price of the common stock. Preferredstock accretion of $2.5 million was recorded and included as minorityinterest for the year ended December 31, 1997. As of December 31,1998, all of the exchangeable preferred stock had been converted.

 

                In November 1998, ACTVissued Series B convertible preferred stock (“Series B Stock”),common stock, and warrants to purchase approximately 1.95 million sharesof common stock at $2.00 per share as a partial exchange for approximately179,000 shares of the subsidiary exchangeable preferred stock. The excess ofthe fair value of this consideration over the carrying value of theexchangeable preferred stock for which the Series B Stock was issued isincluded in minority interest subsidiary preferred stock dividend and accretionin the accompanying statement of operations. The Series B Stock was fullyredeemable by ACTV at any time at a 10% premium above face value plus accrueddividends. The holders of the Series B Stock were prohibited fromconverting any shares into common stock through November 13, 1999.Beginning November 13, 1999, the number of shares issued upon conversionwas to be determined by dividing the liquidation value of $1,000 plus accrueddividends by the conversion price of $2.00 per common share. BeginningFebruary 13, 2000, the number of shares issued upon conversion was to bedetermined by dividing the liquidation value of $1,000 plus accrued dividendsby the conversion price of $1.33 per common share. The beneficial conversionfeature related to the possible conversion of the Series B Stock at $1.33per share, which equaled $2,527,723 at the issuance date, was attributed toadditional paid-in-capital and was being accounted for as a charge to net lossapplicable to common stockholders over the period from issuance throughFebruary 13, 2000. During May 1999, ACTV redeemed all of theoutstanding Series B Stock for a total of approximately $5.2 million.The Series B Stock had been convertible into common stock at $2.00 pershare beginning in November 1998. ACTV effectively redeemed theSeries B Stock at an equivalent of $2.20 per common stock share, a pricesignificantly less than the market price at the time of the redemption. Theredemption avoided the possible future issuance of more than 2.8 millionshares of common stock.

 

*Debt Financing*

 

                In January 1998, theCompany issued $5.0 million aggregate principal amount notes. The noteshad an interest rate of 13.0% per annum, payable semi-annually, with principalrepayment in one installment on June 30, 2003. The Company had the optionto pay any four semi-annual interest payments in kind rather than in cash, withan increase in the rate applicable to such payments in kind to 13.75% perannum. The Company chose to make the first two semi-annual interest payments(June 30, 1998 and December 31, 1998) in kind. In connection with thenote, the holders received on January 14, 1998 a common stock purchasewarrant (The “Warrant”) of Texas Network that granted the holders either theright to purchase up to 17.5% of the fully–diluted shares of common stockof Texas Network or, through July 14, 1999, to exchange the Warrant forsuch number of shares of the Company’s common stock, at the time of and givingeffect to such exchange, that were equal to 5.5% of the fully diluted number ofshares of common stock outstanding.

 

                For accounting purposes, theCompany allocated approximately $1.4 million to the value of the Warrant,based on the market value of the Company’s common stock into which the Warrantwas convertible at issuance. The Warrant was included outside of ConsolidatedStockholders’ Equity due to its cash put feature and the notes were recorded ata value of proceeds received less the value attributed to the Warrant. Thedifference between the recorded value of the notes and their principal valuewas being amortized as additional interest expense over the life of the notes.The Warrant was exchanged and exercised for the Company’s common stock duringthe first quarter of 1999.

 

 

F-9

----

 

                On April 3, 2000, theCompany repaid certain notes in full, thereby incurring a loss onextinguishment of debt that was recorded as an extraordinary item in thequarter ended June 30, 2000. The extraordinary loss includes a prepaymentpremium of $369,632, and the unamortized original issue discount and deferredissue costs of $819,294 and $222,213, respectively, for a total loss of$1,411,139, or $0.03 per share.

 

 

*ConvertiblePreferred Stock*

 

                At December 31, 1999, theCompany was authorized to issue 1,000,000 shares of blank check preferredstock, par value $0.10 per share, of which 120,000 shares were designatedSeries A Convertible Preferred Stock and 6,110 shares were designatedSeries B Stock. There were 86,200 and 56,300 shares of Series APreferred outstanding at December 31, 1997 and 1998, respectively. Prior toDecember 31, 1999, the holders converted all of the outstanding shares ofSeries A preferred stock and the Company cancelled the Series Adesignation. There were 0 and 5,018 shares of Series B Stock issued andoutstanding as of December 31, 1997 and 1998, respectively. The Companyredeemed all of the Series B Stock in May 1999 and cancelled theSeries B Stock designation.

 

*Preferred StockRights Agreement*

 

                Our policy is and has been tolicense our technology and arrange joint ventures for its use in a number ofdifferent industries. In August 2000, our Board of Directors adopted aPreferred Stock Rights Agreement, which gives our Board of Directors certainalternative courses of action if a potential acquirer of 15% or more of ourcommon stock is deemed unlikely to further such policy or if such potentialacquirer is deemed likely to act inconsistently with the best interests of ourstockholders. Pursuant to the Preferred Stock Rights Agreement, we coulddistribute certain preferred stock purchase rights to our current stockholders.These rights would become exercisable if an outside party became the beneficialowner of 15% or more of our issued and outstanding common stock, unlessour Board of Directors determines to defer the exercise of, or redeem, suchrights. The potential acquirer’s rights under the Preferred Stock RightsAgreement will be null and void. Once exercisable, each preferred stockpurchase right would entitle the holder thereof to purchase .001 of share ofour Series C Preferred Stock at an exercise price of $0.00001 per share.Each share of our Series C Preferred Stock shall entitle the holderthereof to 1,000 votes on all matters submitted to a vote of our stockholders.Once issued our Board of Directors could vote to exchange the preferred stockpurchase rights for shares of our common stock. A potential acquirer may bediscouraged from completing an acquisition if it could not be assured of havingcontrol of us.

 

                Our Bylaws provide that only amajority of the Board of Directors or the Chairman of the Board may call aspecial meeting of the stockholders. In addition, our certificate ofincorporation permits our Board of Directors to have us designate and issue,without stockholder approval, preferred stock with voting, conversion and otherrights and preferences that could differentially and adversely affect thevoting power or other rights of the holders of our common stock. Our issuanceof preferred stock or of rights to purchase preferred stock could also be usedto discourage an unsolicited acquisition proposal.

 

                ACTV Entertainment, Inc.(“Entertainment”) and HyperTV Networks, Inc. are subsidiaries ofACTV, Inc. In part as an anti-takeover defense, in 1997 and 1998Entertainment and HyperTV granted stock options for their respectiveClass B common shares to a limited number of their officers and employees,which Class B stock options—as amended in December, 1999 wereto become exercisable only upon a “change of control” of ACTV, Inc., asthe term “change of control” was defined in those options. As of December 31,2000, all of those Class B stock options were terminated, with the resultthat there are no options outstanding at this date with respect to any of theClass B shares of either Entertainment or HyperTV.

 

 

F-10

----

 

**6. Stock Options and Warrants**

 

AtDecember 31, 2000, the Company had reserved shares of Common Stock forissuance as follows:

 
|                                                 |   | **Authorized** |   | **Granted (net of****cancellations)** |   | **Exercised** |   | **Outstanding** |   |
|------------------------------------------------------|--------|----------------|--------|---------------------------------------|--------|---------------|--------|-----------------|--------|
| 1989 Non-Qualified Stock Option Plan                 |   | 100,000        |   | 91,500                                |   | 82,000        |   | 9,500           |   |
| 1996 Qualified Stock Option Plan                     |   | 500,000        |   | 493,484                               |   | 331,214       |   | 162,270         |   |
| 1998 Qualified Stock Option Plan                     |   | 900,000        |   | 802,167                               |   | 170,161       |   | 632,006         |   |
| 1999 Qualified Stock Option Plan                     |   | 1,500,000      |   | 1,412,667                             |   | 113,814       |   | 1,298,853       |   |
| 2000 Qualified Stock Option Plan                     |   | 4,000,000      |   | 3,379,665                             |   | 15,822        |   | 3,363,843       |   |
| Options and warrants granted outside of formal plans |   |           |   | 23,578,108                            |   | 10,970,129    |   | 12,607,979      |   |
|                                                 |   |           |   |                                  |   |          |   |            |   |
| Total                                                |   |           |   |                                  |   |          |   | 18,074,451      |   |

 

                In August 1989, the Boardof Directors approved a Non-Qualified Stock Option Plan providing for thegranting to employees, officers, directors, consultants and independentcontractors options to purchase shares of common stock. The Non-Qualified Planstipulates that the option price not be less than fair market value at the dateof grant, or such other price as the Board may determine

 

                During the years 2000, 1999,1998 and 1996 the Board of Directors approved stock option plans providing forstock option grants to employees and others who provide significant services tothe Company.

 

                At December 31, 2000, theCompany also had outstanding options and warrants not issued pursuant to aformal plan that were issued to directors, certain employees, and consultantsand pursuant to financing transactions for the purchase of common stock. Theprices of these options and warrants range from $0.82 to $153.32 per share;they have expiration dates in the years 2001 through 2010. The options andwarrants granted are not part of the stock option plans discussed above.

 

                Asummary of the status of the Company’s stock options as of December 31,2000, 1999 and 1998 is as follows:

 
|                                               |   | **2000****Shares** |   | **2000****WeightedAverageExercisePrice** |   | **1999****Shares** |       | **1999****WeightedAverageExercisePrice** |   | **1998****Shares** |   | **1998****WeightedAverageExercisePrice** |   |
|----------------------------------------------------|--------|--------------------|--------|------------------------------------------|--------|--------------------|------------|------------------------------------------|--------|--------------------|--------|------------------------------------------|--------|
| Outstanding  at beginning of period                |   | 16,736,838         |   |                                     |   | 7,850,007          |       |                                     |   | 3,539,218          |   |                                     |   |
| Options  and warrants granted                      |   | 4,698,976          |   | $                                        | 8.87   |               | 14,863,501 |                                     | $      | 8.20               |   | 6,376,073                                |   | $ | 1.91 |   |
| Options  and warrants exercised                    |   | (3,247,196         | )      | $                                        | 6.74   |               | (5,801,670 | )                                        | $      | 1.98               |   | (1,844,951                               | )      | $ | 1.64 |   |
| Options  and warrants terminated                   |   | (114,167           | )      | $                                        | 11.75  |               | (175,000   | )                                        | $      | 4.00               |   | (220,333                                 | )      | $ | 2.86 |   |
|                                               |   |               |   |                                     |   |               |       |                                     |   |               |   |                                     |   |
| Outstanding  at end of period                      |   | 18,074,451         |   | $                                        | 7.55   |               | 16,736,838 |                                     | $      | 7.44               |   | 7,850,007                                |   | $ | 1.90 |   |
| Options  and warrants exercisable at end of period |   | 10,061,021         |   | $                                        | 8.28   |               | 9,369,330  |                                     | $      | 9.08               |   | 5,782,275                                |   | $ | 1.99 |   |

 

 

F-11

----

 

The following table summarizes information aboutstock options outstanding at December 31, 2000:

 
| **Range of Exercise Prices** |            | **Number Outstanding****at12/31/2000** |      | **Weighted****AverageRemainingContractualLife** |      | **Weighted****AverageExercisePrice** |   | **Number****Exercisable at12/31/2000** |   | **Weighted Average****ExercisePrice** |   |
|------------------------------|-----------------|----------------------------------------|-----------|-------------------------------------------------|-----------|--------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
| $                            | 0.00 to 4.00    |                                   | 6,684,892 |                                            | 4.2 Years |                                 | $      | 1.60                                   |   | 4,601,288                             |   | $ | 1.58 |   |
| $                            | 4.01 to 8.00    |                                   | 4,141,505 |                                            | 5.3 Years |                                 | $      | 6.89                                   |   | 100,501                               |   | $ | 6.05 |   |
| $                            | 8.01 to 12.00   |                                   | 1,154,900 |                                            | 3.8 Years |                                 | $      | 9.81                                   |   | 308,574                               |   | $ | 9.11 |   |
| $                            | 12.01 to 16.00  |                                   | 6,067,000 |                                            | 2.3 Years |                                 | $      | 13.91                                  |   | 5,030,503                             |   | $ | 14.00 |   |
| $                            | 15.01 to 200.00 |                                   | 26,154    |                                            | 4.9 Years |                                 | $      | 88.90                                  |   | 20,155                                |   | $ | 108.78 |   |
| Totals                       |            | 18,074,451                             |      |                                            |      |                                 |   | 10,061,021                             |   |                                  |   |

 

                The weighted average fair valueof options granted during 2000, 1999 and 1998 was $8.87, $8.20 and $1.91 pershare, respectively, excluding the value of options granted and terminatedwithin the year. In the case of each issuance, options were issued at anexercise price that was higher than the fair market value of the Company’scommon stock on the date of grant. The Company applies APB No. 25 andrelated Interpretations in accounting for its stock option and purchase plans.Approximately 5,230,000, 4,172,000 and 692,000 options are subject to variableplan accounting in the years ended December 31, 2000, 1999 and 1998,respectively (See Note 20.)  Hadcompensation cost for the Company’s option issuances been determined based onthe fair value at the grant dates consistent with the method of FASB Statement123, the Company’s net income/(loss) and income/(loss) per basic and dilutedshare for the years ended December 31, 2000, 1999, and 1998 would havebeen changed the pro forma amounts indicated below:

 
|                                                |   | **2000** |        | **1999** |   | **1998**     |   |
|-----------------------------------------------------|--------|----------|-------------|----------|--------|--------------|--------|
| Net  income /(loss) to common stockholders     |   |     |        |     |   |         |   |   |   |   |
| As reported                                         |   |     | 152,092.633 |     |   | (235,369,702 | )      |   | (23,821,516 | ) |
| Pro forma                                           |   |     | 129,426,485 |     |   | (237,772,519 | )      |   | (25,432,653 | ) |
|                                                |   |     |        |     |   |         |   |   |   |   |
| Net income /(loss) per basic common share           |   |     |        |     |   |         |   |
| As reported                                         |   |     |        |     |   |         |   |   |   |   |
| Before extraordinary item                           |   | $        | 3.10        |     | $      | (6.11        | )      | $ | (1.10 | ) |
| Extraordinary item                                  |   |     | (0.03       | )        |   | —       |   |   | — |   |
| Net income (loss) applicable to common stockholders |   | $        | 3.07        |     | $      | (6.11        | )      | $ | (1.10 | ) |
|                                                |   |     |        |     |   |         |   |   |   |   |
| Net income /(loss) per basic common share           |   |     |        |     |   |         |   |   |   |   |
| Pro forma:                                          |   |     |        |     |   |         |   |   |   |   |
| Before extraordinary item                           |   | $        | 2.63        |     | $      | (6.18        | )      | $ | (1.17 | ) |
| Extraordinary item                                  |   |     | (0.03       | )        |   | —       |   |   | — |   |
| Net income (loss) applicable to common stockholders |   | $        | 2.60        |     | $      | (6.18        | )      | $ | (1.17 | ) |

 
| Net income /(loss) per diluted common share         |   |   |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| As reported                                         |   |   |   |   |   |   |   |   |   |   |
| Before extraordinary item                           |   | $      | 2.53   |   | $      | (6.11  | )      | $ | (1.10 | ) |
| Extraordinary item                                  |   |   | (0.02  | )      |   | — |   |   | — |   |
| Net income (loss) applicable to common stockholders |   | $      | 2.51   |   | $      | (6.11  | )      | $ | (1.10 | ) |
|                                                |   |   |   |   |   |   |   |   |   |   |
| Net income /(loss) per diluted common share         |   |   |   |   |   |   |   |   |   |   |
| Pro forma:                                          |   |   |   |   |   |   |   |   |   |   |
| Before extraordinary item                           |   | $      | 2.16   |   | $      | (6.18  | )      | $ | (1.17 | ) |
| Extraordinary item                                  |   |   | (0.02  | )      |   | — |   |   | — |   |
| Net income (loss) applicable to common stockholders |   | $      | 2.14   |   | $      | (6.18  | )      | $ | (1.17 | ) |

 

                The Company estimated the fairvalue of options issued during 2000, 1999, and 1998 on the date of each grantusing the Black–Scholes option–pricing model with the followingweighted–average assumptions: no dividend yield, expected volatility for2000, 1999, 1998 of 122.4%, 94.4% and 49.5%, respectively, and a risk freeinterest rate of 6% for all years.

 

F-12

----

 

**7. Stock Appreciation Rights Plans**

 

                Asof December 31, 1998, the Company had granted 896,000 outstanding StockAppreciation Rights (“SARs”) (with an exercise price of $1.50 per share). TheSARs expire between 2001 and 2006. During 1998, no SARs were exercised.

 

                TheCompany’s balance sheets at December 31, 1999 and December 31, 1998,reflect expense accruals of $0 and $2.0 million, respectively, related tothe Company’s SARs plan. In May 1999, three directors agreed toretroactively exercise their vested SARs for unregistered shares of commonstock, based upon the closing market price of $3.9375 on January 4, 1999.As a result, the SARs expense for the first quarter of 1999 was approximately$3.2 million less than it would have been otherwise. InSeptember 1999, all remaining SARs were converted into options that becamepart of the Company’s 1999 Option Plan. In 1999, this conversion resulted inexpense of $1.3 million with an additional charge of $381,000 to futureperiods when the corresponding options vest. In September 1999, the Companyexchanged all of the outstanding SAR for stock options with the same exerciseprices and vesting dates and cancelled its SAR plans. To account for thisexchange, for the year ended December 31, 1999, the Company simultaneouslyincurred non-cash compensation expense of $1,254,000 as a component of sellingand administrative expense and non-cash income of $2.6 million from theelimination of the related SAR liability. Additionally, the Company incurred a$381,000 non-cash charge to deferred expenses for rights that had not vested asof December 31, 1999.

 

                The stock appreciation rightsexpense for the periods ended December 31, 1999 and 1998 was $1,950,330and $2,000,062, respectively. In September 1999, all remaining SARs wereconverted into options under our 1999 option plan. Deferred expenses wererecorded related to SARs that had not yet vested. In May 2000, werecognized $306,000 of those deferred expenses as period costs.

 

**8.  Income Taxes**

 

                The Company accounts for incometaxes in accordance with the provisions of SFAS No. 109, *Accountingfor Income Taxes*.

 

                Deferred income taxes reflectthe net tax effects at an effective tax rate of 40% of (a) temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes, and(b) operating loss and tax credit carryforwards. The tax effects ofsignificant items comprising the Company’s net deferred tax asset as ofDecember 31, 2000 and 1999 are as follows (000's omitted):

 
|                                               |   | **2000** |   | **1999** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|
| Deferred tax assets:                               |   |     |   |     |   |
| Operating loss carryforwards                       |   | $        | 40,684 |     | $      | 27,388 |   |
| Differences between book and tax basis of property |   | 635      |   | 1,561    |   |
| Deferred compensation                              |   | 8,496    |   | 83,978   |   |
|                                               |   | 49,815   |   | 112,927  |   |
| Deferred tax liabilities:                          |   |     |   |     |   |
| Differences between book and tax basis of property |   | (477     | )      | (305     | )      |
|                                               |   |     |   |     |   |
|                                               |   | 49,338   |   | 112,622  |   |
| Valuation Allowance                                |   | (49,338  | )      | (112,622 | )      |
|                                               |   |     |   |     |   |
| Net deferred tax asset                             |   | $        | — |     | $      | — |   |

 

                The increase (decrease) in thevaluation allowance for the years ended December 31, 2000, and 1999,respectively was approximately ($63.2) million $91.5 million,respectively. There was no provision or benefit for federal income taxes as aresult of the net operating loss carryforwards in the current year.

 

 

F-13

----

 

                Section 382 ofthe Internal Revenue Code of 1986, as amended, limits the ability of acorporation that undergoes an “ownership change” to use its net operatinglosses to reduce its tax liability. In the event of an ownership change, wewould not be able use our pre-ownership–change net operating losses inexcess of the limitation imposed by Section 382. This limitation generallywould be calculated by multiplying the value of our stock immediately beforethe ownership change by the long-term federal rate.

 

                At December 31, 2000 and 1999, the Company hadFederal net operating loss (“NOL”) carryovers of approximately $115.2 and$77.5 million, respectively. These carryovers will expire between theyears 2001 and 2020. There may be some limitation on the use of these netoperating loss carryforwards under the Internal Revenue Code Section 382ownership change rules.

 

                During 2000, the Company entered into an investmentthat created a foreign subsidiary called Digital ADCO International. Althoughthere are currently no material tax implications, the investment may result inan income tax liability that is not limited by the Company's existing NOL.

 

**9.  Retirement Plan**

 

                The Company sponsors a 401(k)savings plan for employees who have completed at least one full year ofservice. The Company has a policy of matching employee 401(k) deferrals, dollarfor dollar, up to the first 5% of the participating employee’s annualcompensation. Percentage vesting of the matching contributions is based on anemployee’s term of service with the Company, starting at 20% for employees withmore than two years of service, and increasing ratably to 100% for employeeswith more than six years of service. To date, the Company has made all suchcontributions in the form of its common stock. In 2000, 1999 and 1998, theCompany contributed the common stock equivalent of $247,275, $154,565 and$132,162 respectively.

 

**10.  Commitments**

 

                At December 31, 2000,future aggregate minimum lease commitments under non-cancelable operatingleases, were as follows:

 

| **Year**   |   | **Commitment** |       |
|------------|--------|----------------|------------|
| 2001       |   | $              | 2,635,562  |   |
| 2002       |   | 2,731,185      |       |
| 2003       |   | 2,734,351      |       |
| 2004       |   | 2,640,706      |       |
| 2005       |   | 2,508,499      |       |
| Thereafter |   | 28,159,327     |       |
| Total      |   | $              | 41,409,630 |   |

 

                The leases contain customaryescalation clauses, based principally on real estate taxes. Rent expenserelated to these leases for the years ended December 31, 2000, 1999 and1998 aggregated $1,240,625, $577,956 and $476,513, respectively.

 

**11.  Concentration of Credit Risk**

 

                Financial instruments whichpotentially subject the Company to concentrations of credit risk consistprincipally of temporary cash investments and receivables. Concentrations ofrisk with respect to trade receivables exist because of the relatively fewcompanies or other organizations with which the Company currently doesbusiness. The Company attempts to limit these risks by closely monitoring thecredit of those to whom it is contemplating providing its products, andcontinuing such credit monitoring activities and other collection activitiesthroughout the payment period. In certain instances, the Company will furtherminimize concentrations of credit risks by requiring partial advance paymentsfor the products provided. The Company’s temporary cash investments consist ofinvestments with high quality financial institutions.

 

Includedin accounts receivable at December 31, 2000 were receivables to one customerthat accounted for 32% of such balance. Included in accounts receivable at December 31, 1999 were receivables totwo customers that accounted for 22% and 20% , respectively of such balance.

 

 

F-14

----

 

**12. Fair Value of Financial Instruments**

 

                The Company acquired a warrantto purchase common shares of Liberty Livewire LLC as described in Note 14.The carrying amounts of other financial instruments, including cash and cashequivalents, accounts receivable, accounts payable and accrued expenses,approximated fair value because of their short maturity.

 

**13.  SegmentReporting**

 

                Wehave two principal business segments. The Digital Television segment, whichincludes Digital ADCO, develops and markets technologies which enablesinteractive television and advertising.

 

                The Enhanced Media segment,which includes HyperTV, Bottle Rocket, and Media Online Services, develops andmarkets technologies for the convergence of the Internet and television, forInternet gaming and for streaming media applications.

 

                Individual customers accountedfor more than 10% of the Company’s revenues during the years ended 2000, 1999,and 1998. For the year ended December 31, 2000, one individual customeraccounted for 23% of sales. For the year ended December 31, 1999, twoindividual customers accounted for the following percentages of sales: 11%, and12%. For the year ended December 31, 1998, two individual customersaccounted for the following percentages of sales: 12% and 35%.

 

                Information concerning theCompany’s business segments in 2000, 1999, and 1998 is as follows:

 
|                                            |   | **2000**    |        | **1999**     |       | **1998**     |       |
|-------------------------------------------------|--------|-------------|-------------|--------------|------------|--------------|------------|
| **Revenues**                                    |   |        | ** **  |         | ** ** |         | ** ** |
| Digital Television                              |   | $           | —      |         | $          | —       |       | $ | — |   |
| Enhanced Media                                  |   | 8,016,453   |        | 2,909,642    |       | 1,625,139    |       |
| Total                                           |   | $           | 8,016,453   |         | $          | 2,909,642    |       | $ | 1,625,139 |   |
|                                            |   |        |        |         |       |         |       |
| **Depreciation & Amortization**             |   |        |        |         |       |         |       |
| Digital Television                              |   | $           | 1,675,434   |         | $          | 891,729      |       | $ | 763,241 |   |
| Enhanced Media                                  |   | 1,183,473   |        | 565,466      |       | 231,324      |       |
| Unallocated corporate                           |   | 1,048,724   |        | 660,901      |       | 563,151      |       |
| Total                                           |   | $           | 3,907,631   |         | $          | 2,118,096    |       | $ | 1,557,716 |   |
|                                            |   |        |        |         |       |         |       |
| **Interest Income /(Expense)**                  |   |        |        |         |       |         |       |
| Digital Television                              |   | $           | (29,229     | )            | $          | (1,014,617   | )          | $ | (850,770 | ) |
| Enhanced Media                                  |   | 4,709       |        | 15,872       |       | 14,048       |       |
| Unallocated corporate                           |   | 7,466,830   |        | 420,358      |       | 94,403       |       |
| Total                                           |   | $           | 7,442,310   |         | $          | (578,387     | )          | $ | (742,319 | ) |
|                                            |   |        |        |         |       |         |       |
| **Net Income/(Loss) before extraordinary item** |   |        |        |         |       |         |       |
| Digital Television                              |   | $           | (8,864,572  | )            | $          | (6,203,020   | )          | $ | (5,273,173 | ) |
| Enhanced Media                                  |   | (14,146,874 | )           | (8,069,935   | )          | (3,695,231   | )          |
| Unallocated corporate                           |   | 176,515,218 |        | (220,601,316 | )          | (14,373,939  | )          |
| Total                                           |   | $           | 153,503,772 |         | $          | (234,875,271 | )          | $ | (23,342,343 | ) |
|                                            |   |        |        |         |       |         |       |
| **Capital Expenditures**                        |   |        |        |         |       |         |       |
| Digital Television                              |   | $           | 4,219,555   |         | $          | 2,030,469    |       | $ | 947,710 |   |
| Enhanced Media                                  |   | 2,490,859   |        | 3,179,536    |       | 443,190      |       |
| Unallocated corporate                           |   | 6,683,747   |        | 6,110,909    |       | 618,495      |       |
| Total                                           |   | $           | 13,394,161  |         | $          | 11,320,914   |       | $ | 2,009,395 |   |
|                                            |   |        |        |         |       |         |       |
| **Total Assets**                                |   |        |        |         |       |         |       |
| Digital Television                              |   | $           | 17,010,470  |         | $          | 6,244,009    |       | $ | 4,708,444 |   |
| Enhanced Media                                  |   | 83,127,887  |        | 6,000,980    |       | 1,377,728    |       |
| Unallocated corporate                           |   | 135,370,223 |        | 16,739,389   |       | 7,646,773    |       |
| Total                                           |   | $           | 235,508,580 |         | $          | 28,984,378   |       | $ | 13,732,945 |   |

 

 

F-15

----

 

**14.  Investments**

 

                In 2000, the Company enteredinto various strategic equity investments in privately held companies thatoperate in its industry. At December 31, 2000, the investments are statedat cost, aggregating $3,250,000. We do not exercise effective control orsignificant influence over operations for any of these strategic equityinvestments. The Company wrote off an investment totaling $750,000 during 2000,which is recorded in selling and administrative expenses.

 

                The Company and Liberty LivewireLLC, a unit of Liberty Livewire Corporation (“Livewire”) (formerly known asTodd AO Corporation), entered into a joint marketing venture “HyperTV withLivewire” on April 13, 2000. HyperTV with Livewire uses ACTV’s patentedHyperTV convergence technology to combine the emotive power of television withthe interactivity of the Internet, and provides turnkey convergence services,including application hosting, web authoring services, data management,e-commerce and other value–added services for advertisers, televisionprogrammers, studios and networks.

 

                The Company received a warrant (“Livewire Warrant”)to acquire 2,500,000 shares of Livewire at $30 per share in connection withentering into the joint marketing agreement. The warrant becomes exercisable atthe rate of 500,000 shares per year, commencing on April 13, 2001,includes certain registration rights, and may be exercised until March 31,2015. With certain exceptions, the warrant is not transferable. The Company hasrecorded an investment and deferred revenue in the amount of $76,016,175, theestimated value of the warrant at April 13, 2000. The estimated value ofthe warrant was $17,300,000 at December 31, 2000. The Company estimatedthe value of the warrant using the Black–Scholes pricing model with arisk free rate of 6.5%, a volatility of 80% and assuming no cash dividends. Foraccounting purposes, the Company will periodically estimate the value of thewarrant. Any change in estimated value attributable to shares that are bothexercisable and are expected to become registered within one year were to berecorded through increases or decreases in Other Comprehensive Income, however,this accounting will change once the Company adopts SFAS 133, (see Note 2). Thedeferred income recorded by the Company is being amortized into income over aperiod of 21 years, the contractual term of the joint marketing venture.

 

**15.  Executive Compensation**

 

                For the years endedDecember 31, 2000 and 1999, the Company incurred $6.9 million and$3.1 million, respectively, of compensation expense in connection with anexecutive bonus plan. Pursuant to this plan, supplemental compensation ismeasured as of March 31, and is based on changes in the market value ofour common stock. Payment is made in unregistered securities, and futurecompensation to be recognized is contingent on continued employment of theexecutive and subject to forfeiture.

 

**16.  Supplemental Disclosure of Cash FlowInformation**

 

                The consolidated financialstatements for the years ended December 31, 2000, 1999, and 1998 reflect non-cash activity thatrelate to stock appreciation rights, notes and stock issued in lieu of cashcompensation, preferred stock accretions and revenue in connection with theLivewire Warrant.

 

                The Company made no cashpayments of interest or income taxes during the year ended December 31,1998. During the years ended December 31, 2000 and 1999, the Company madecash interest payments of $204,976 and $739,263, respectively, primarily relatedto the $5.0 million original fair value note, and no cash payments ofincome tax.

 

 

F-16

----

 

**17. Digital ADCO**

 

                We record minority interestresulting from Digital ADCO. Digital ADCO was formed in November 1999 andco-founded by ACTV, Inc. and Motorola Broadband. Digital ADCO develops andmarkets applications for the delivery of addressable advertising. Under theterms of our agreement with Motorola Broadband Communications Sector, welicensed five of our patents to Digital ADCO, and Motorola BroadbandCommunications Sector licensed six of its patents and made a capital commitmentto Digital ADCO. On September 6, 2000, Digital ADCO, Inc., asubsidiary of ACTV, Inc. and General Instrument Corporation, a subsidiary ofMotorola Broadband Communications Sector, announced the completion of a directminority investment by OpenTV Corp. Digital ADCO, Inc. and OpenTV Corp.have joined to create a new subsidiary named SpotOn International Ltd tolicense and exploit Digital ADCO’s technology outside the U.S., Canada andMexico. During August 2000, OpenTV made a capital contribution andcontributed patents on a non-exclusive basis to Digital ADCO. Additionally,Digital ADCO International was formed to license and distribute products andservices outside of North America and other western hemisphere countries.Digital ADCO, Inc.’s issued and outstanding shares of capital stockpresently consist of Class A common stock, having one vote per share, andClass B common stock, having 25 votes per share. All of Digital ADCO’sissued and outstanding shares are presently held by three investors. Open TVcurrently owns the issued and outstanding Class A common shares.ACTV, Inc. and Motorola Broadband Communications Sector, the co-founders ofDigital ADCO, own the issued and outstanding Class B common shares.ACTV, Inc. currently owns 45.9% of Digital ADCO, and exercises votingcontrol.

 

                For the periods endedDecember 31, 2000 and 1999, we allocated income (losses) in the amount of$(1,622,597) and $588, respectively, from Digital ADCO to MotorolaBroadband Communications Sector and OpenTV.

 

**18.  Subsequent Event**

 

                During March 2001, the Companyacquired all of the assets and business of Intellocity, Inc.,(“Intellocity”) a technology and engineering solutions provider focusing on theinteractive television market. The Company acquired Intellocity for 4,007,890shares of the Company’s common stock, aggregating $23.2 million, andissued options to purchase 762,665 shares of the Company’s common stock valuedat $4.3 million, for an aggregate purchase price of $27.5 million.The Company could make an additional payment of up to1.5 million sharesand options contingent upon Intellocity achieving certain performance targetsfor the year ended December 31, 2001. Intellocity shareholders are subjectto provisions restricting the sale of the ACTV stock, which range over4 years. The acquisition will be accounted for under the purchase methodof accounting in the first quarter of 2001.

 

 

F-17

----

 

**19. Quarterly Results (Unaudited)**

 

The following is a summary of the unaudited selectedquarterly  results for which alladjustments necessary for a fair presentation of each period wereincluded.  As discussed in Note 20, theresults of operations for the years ended December 31, 2000 and 1999 have beenrestated.

 

 
| **(Dollars in  000’s Except****Per Share Data**          |   | **First Quarter**            |   | **Second Quarter** |   | **Third Quarter**            |   | **Fourth Quarter** |   |
|---------------------------------------------------------------|--------|------------------------------|--------|--------------------|--------|------------------------------|--------|--------------------|--------|
|                                                          |   | **(As previously reported)** |   | **(As Restated)**  |   | **(As previously reported)** |   | **(As Restated)**  |   | **(As previously reported)** |   | **(As Restated)** |   | **(As previously reported)** |   | **(As Restated)** |   |
| **2000**                                                      |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| **Statement of Operations**                                   |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| Revenues                                                      |   | $                            | 1,393  |               | $      | 1,393                        |   | $                  | 1,655  |   | $ | 1,655 |   | $ | 2,794 |   | $ | 2,794 |   | $ | 2,174 |   | $ | 2,174 |   |
|                                                          |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| Operating (loss)/income                                       |   | (6,313                       | )      | 33,269             |   | (9,675                       | )      | 84,899             |   | (10,436 | ) | (6,534 | ) | (15,931) |   | 32,684 |   |
|                                                          |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| (Loss)/incomebefore minority interest  and extraordinary item |   | (5,407                       | )      | 34,176             |   | (7,477                       | )      | 87,098             |   | (8,224 | ) | (4,322 | ) | (13,806 | ) | 34,808 |   |
|                                                          |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| Net (loss)/income                                             |   | (5,236                       | )      | 34,346             |   | (8,580                       | )      | 85,994             |   | (7,617 | ) | (3,715 | ) | (13,147 | ) | 35,468 |   |
|                                                          |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| (Loss)/income applicableto common stockholders                |   | (5,236                       | )      | 34,346             |   | (8,580                       | )      | 85,994             |   | (7,617 | ) | (3,715 | ) | (13,147 | ) | 35,468 |   |
|                                                          |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| (Loss)/income per common share                                |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| Basic                                                         |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| Before extraordinary item                                     |   | $                            | (0.12  | )                  | $      | 0.76                         |   | $                  | (0.14  | ) | $ | 1.73 |   | $ | (0.15 | ) | $ | (0.07 | ) | $ | (0.26 | ) | $ | 0.69 |   |
| Extraordinary item                                            |   | —                       |   | —             |   | (0.03                        | )      | (0.03              | )      | — |   | — |   | — |   | — |   |
| After extraordinary item                                      |   | $                            | (0.12  | )                  | $      | 0.76                         |   | $                  | (0.17  | ) | $ | 1.70 |   | $ | (0.15 | ) | $ | (0.07 | ) | (0.26 | ) | 0.69 |   |
|                                                          |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| Diluted                                                       |   |                         |   |               |   |                         |   |               |   |   |   |   |   |   |   |   |   |
| Before extraordinary item                                     |   | $                            | (0.12  | )                  | $      | 0.76                         |   | $                  | (0.14  | ) | $ | 1.48 |   | $ | (0.15 | ) | $ | (0.07 | ) | $ | (0.26 | ) | $ | 0.62 |   |
| Extraordinary item                                            |   | —                       |   | —             |   | (0.03                        | )      | (0.02              | )      | — |   | — |   | — |   | — |   |
| After extraordinary item                                      |   | $                            | (0.12  | )                  | $      | 0.76                         |   | $                  | (0.17  | ) | $ | 1.46 |   | $ | (0.15 | )  | $ | (0.07 | ) | $ | (0.26 | ) | $ | 0.62 |   |

 
| ** **                              |   | **First Quarter**             |   | **Second Quarter** |   | **Third Quarter**             |   | **Fourth Quarter** |   |
|-----------------------------------------|--------|-------------------------------|--------|--------------------|--------|-------------------------------|--------|--------------------|--------|
| ** **                              |   | **(As previously  reported)** |   | **(As Restated)**  |   | **(As previously  reported)** |   | **(As Restated)**  |   | **(As previously  reported)** |   | **(As Restated)** |   | **(As previously  reported)** |   | **(As Restated****)** |   |
| **1999**                                |   |                          |   |               |   |                          |   |               |   |   |   |   |   |   |   |   |   |
| **Statement of Operations**             |   |                          |   |               |   |                          |   |               |   |   |   |   |   |   |   |   |   |
| Revenues                                |   | $                             | 570    |               | $      | 570                           |   | $                  | 557    |   | $ | 557 |   | $ | 604 |   | $ | 604 |   | $ | 1,179 |   | $ | 1,179 |   |
|                                    |   |                          |   |               |   |                          |   |               |   |   |   |   |   |   |   |   |   |
| Operating loss                          |   | (7,436                        | )      | (35,047            | )      | (6,357                        | )      | (16,976            | )      | (4,534 | ) | (6,421 | ) | (7,626 | ) | (175,852 | ) |
|                                    |   |                          |   |               |   |                          |   |               |   |   |   |   |   |   |   |   |   |
| Net loss                                |   | (8,098                        | )      | (35,231            | )      | (6,589                        | )      | (17,191            | )      | (4,607 | ) | (6,494 | ) | (7,732 | ) | (175,959 | ) |
|                                    |   |                          |   |               |   |                          |   |               |   |   |   |   |   |   |   |   |   |
| Loss applicableto common stockholders   |   | (8,098                        | )      | (35,709            | )      | (6,589                        | )      | (17,208            | )      | (4,607 | ) | (6,494 | ) | (7,732 | ) | (175,959 | ) |
|                                    |   |                          |   |               |   |                          |   |               |   |   |   |   |   |   |   |   |   |
| Basic and diluted loss per common share |   | $                             | (0.25  | )                  | $      | (1.11                         | )      | $                  | (0.16  | ) | $ | (0.43 | ) | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.18 | ) | $ | (4.17 | ) |
|                                         |        |                               |        |                    |        |                               |        |                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Notethe effect of stock options or convertible preferred stock on the calculationof loss per common share would be anti-dilutive for the year ended December 31,1999.

 

F-18

----

 

**20.  Restatement**

 

**               **Subsequent to the issuance of theCompany’s 2000 consolidated financial statements, the Company determined thatstock options granted to certain employees should be accounted for as variableplan stock options.  Accordingly, theCompany has restated its financial statements to reflect the application ofvariable stock option accounting to the affected stock option awards.  The changes resulted in the recording ofadditional stock-based compensation of $1.28 million and $208.3 million for theyears ended December 31, 1998 and 1999 and a reversal of substantially all ofsuch stock-based compensation expense ($186.7 million) in the year endedDecember 31, 2000.  This change has noimpact of the Company’s previously reported cash flows and no material balancesheet impact.  The cumulative effect ofthe change on years prior to 1998 was not material.

 

A summary of the significant effects of the restatement is as follows:

 
|                              |   | **December 31,**           |      |
|-----------------------------------|--------|----------------------------|-----------|
|                              |   | **2000**                   |      | **1999** |   |
|                              |   | **As Previously Reported** |      | **As Restated** |   | **As Previously Reported** |   | **As Restated** |   |
| **Balance Sheet Items**:          |   |                       |      |   |   |   |   |   |   |
|                              |   |                       |      |   |   |   |   |   |   |
| Other current assets              |   | $                          | 4,402,541 |   | $ | 3,758,935 |   | $ | 1,589,430 |   | $ | 1,133,414 |   |
| Notes receivable from stock sales |   | —                     |      | 643,606 |   | — |   | 456,016 |   |
| Additional paid-in-capital        |   | 273,605,573                |      | 297,073,713 |   | 116,448,332 |   | 326,589,837 |   |
| Accumulated deficit               |   | (138,215,417               | )         | (161,683,557 | ) | (100,922,031 | ) | (311,063,536 | ) |
|                                   |        |                            |           |  |  |  |  |  |  |  |  |  |  |

 

 
|                                                                                       |   | **For The Years Ended December 31,** |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                       |   | **2000**                             |   | **1999** |   | **1998** |   |
|                                                                                       |   | **As Previously Reported**           |   | **As Restated** |   | **As Previously Reported** |   | **As Restated** |   | **As Previously Reported** |   | **As Restated** |   |
| Stock-based compensation expense/(income)                                                  |   | $                                    | — |   | $ | (186,673,365 | )  | — |   | $ | 208,343,386 |   | — |   | $ | 1,278,189 |   |
|                                                                                       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| (Loss)/income from operations                                                              |   | (42,355,260                          | )      | 144,318,105 |   | (25,952,910 | ) | (234,296,296 | ) | (15,893,197 | ) | (17,171,386 | ) |
|                                                                                       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| (Loss)/income before minority interest,  preferred stock dividend, and extraordinary items |   | (34,912,950                          | )      | 151,760,415 |   | (26,531,297 | ) | (234,874,683 | ) | (16,635,516 | ) | (23,342,343 | ) |
|                                                                                       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss)/income applicable to common  stockholders                                       |   | (34,580,732                          | )      | 152,092,633 |   | (27,026,316 | ) | (234,875,271 | ) | (22,543,327 | ) | (23,821,516 | ) |
|                                                                                       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| (Loss)/income per common share:                                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Before extraordinary item                                                                  |   | $                                    | (0.67  | ) | $ | 3.10 |   | $ | (0.70 | ) | $ | (6.11 | ) | $ | (1.04 | ) | $ | (1.10 | ) |
| Extraordinary item                                                                         |   | (0.03                                | )      | (0.03 | ) | — |   | — |   | — |   | — |   |
| Net (loss)/income                                                                          |   | $                                    | (0.70  | ) | 3.07 |   | $ | (0.70 | ) | $ | (6.11 | ) | (1.04 | ) | $ | (1.10 | ) |
|                                                                                       |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                                                                                    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Before extraordinary item                                                                  |   | $                                    | (0.67  | ) | $ | 2.53 |   | $ | (0.70 | ) | $ | (6.11 | ) | $ | (1.04 | ) | $ | (1.10 | ) |
| Extraordinary item                                                                         |   | (0.03                                | )      | (0.02 | ) | — |   | — |   | — |   | — |   |
| Net (loss)/income                                                                          |   | $                                    | (0.70  | ) | $ | 2.51 |   | $ | (0.70 | ) | $ | (6.11 | ) | (1.04 | ) | $ | (1.10 | ) |
|                                                                                            |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14.(a)2. Financial Statement Schedule

 

                The following FinancialStatement Schedule for the years ended December 31, 2000,December 31, 1999, and December 31, 1998 is filed as part of thisAnnual Report.

 

                Schedule II—Valuation andQualifying Accounts and Reserves

 
| **Description**                                     |         | **Balance at****Beginningof Period** |         | **Charged to****Costs andExpenses** |         | **Charged to****OtherAccounts** |         | **Deductions** |   | **Balance at****Endof Period** |   |
|-----------------------------------------------------|--------------|--------------------------------------|--------------|-------------------------------------|--------------|---------------------------------|--------------|----------------|--------|--------------------------------|--------|
|                                                | **Column B** |                                 | **Column C** |                                | **Column D** |                            | **Column E** |           |
| Year ended 12/31/98:                                |         |                                 |         |                                |         |                            |         |           |   |                           |   |
| Accounts receivable allowance for doubtful accounts |         | $                                    | 43,188       |                                | —       |                            | —       |           | $      | 43,188                         |   | — |   |
| Year ended 12/31/99:                                |         |                                 |         |                                |         |                            |         |           |   |                           |   |
| Accounts receivable allowance for doubtful accounts |         | $                                    | —       |                                | —       |                            | —       |           | — |                           | — |   |
| Year ended 12/31/00:                                |         |                                 |         |                                |         |                            |         |           |   |                           |   |
| Accounts receivable allowance for doubtful accounts |         | $                                    | —       |                                | $            | 68,600                          |         | —         |   | $                              | 48,600 |   | $ | 20,000 |   |
|                                                     |              |                                      |              |                                     |              |                                 |              |                |        |                                |        |  |  |  |  |

 

                During 1999, there were nochanges to either the accounts receivable allowance or investment loss reserve.Uncollectable accounts receivables in the amount of $43,188 were writtenoff  in 1998.

 

 

F-19

----

 

**                SIGNATURES**

 

                Pursuant to the requirements ofSection 13 or 15 (d) of the Securities and Exchange Act of 1934, theRegistrant has duly caused this Report to be signed on its behalf by theundersigned thereunto duly authorized in the City of New York and State of NewYork on the 5th day of April 2002.

 
|   | **A****CTV, INC.**                         |
|--------|-------------------------------------------------|
|   | Registrant                                      |
|   |                                            |
|   | /s/  David Reese                                |
|   | David  Reese                                    |
|   | Chairman,  Chief Executive Officer and Director |

 

                Pursuant to the requirements ofthe Securities and Exchange Act of 1934, this Report has been signed below bythe following persons in the capacities and on the date indicated.

 
| **Signature**            |   | **Title**                                                |   | **Date**       |
|--------------------------|--------|----------------------------------------------------------|--------|----------------|
|                     |   |                                                     |   |           |
| /s/ David Reese          |   | Chairman,  Chief Executive Officer and Director          |   | April  5, 2002 |
| David Reese              |   |                                                     |   |           |
|                     |   |                                                     |   |           |
| /s/ Christopher C. Cline |   | Senior  Vice President and Chief Financial Officer       |   | April  5, 2002 |
| Christopher C. Cline     |   |                                                     |   |           |
|                     |   |                                                     |   |           |
| /s/ Day L. Patterson     |   | Executive  Vice President, General Counsel and Secretary |   | April  5, 2002 |
| Day L. Patterson         |   |                                                     |   |           |
|                     |   |                                                     |   |           |
| /s/ William C. Samuels   |   | Director                                                 |   | April  5, 2002 |
| William C. Samuels       |   |                                                     |   |           |
|                     |   |                                                     |   |           |
| /s/ John C. Wilcox       |   | Director                                                 |   | April  5, 2002 |
| John C. Wilcox           |   |                                                     |   |           |
|                     |   |                                                     |   |           |
| /s/ Michael J. Pohl      |   | Director                                                 |   | April  5, 2002 |
| Michael J. Pohl          |   |                                                     |   |           |
|                     |   |                                                     |   |           |

 

----

 

**INDEX TO EXHIBITS**

 

                                                (a)           3. EXHIBITS (inapplicable items omitted):

 
| **Exhibits** |   |                                                                                                                                                                                                        |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1          |   | Agreement  and Plan of Merger dated March 7, 2001, between ACTV, Inc. and Intellocity,  Inc. #                                                                                                              |
| 3.1(a)       |   | Restated  Certificate of Incorporation of ACTV, Inc. *                                                                                                                                                      |
| 3.1(b)       |   | Amendment  to Certificate of Incorporation of ACTV, Inc. **                                                                                                                                                 |
| 3.1(c)       |   | Deleted.                                                                                                                                                                                                    |
| 3.1(d)       |   | Amendment  to Certificate of Incorporation of ACTV, Inc. ##                                                                                                                                                 |
| 3.1(e)       |   | Amended  and Restated Certificate of Incorporation of ACTV, Inc. #                                                                                                                                          |
| 3.2          |   | By-Laws  of ACTV, Inc. *                                                                                                                                                                                    |
| 3.2(a)       |   | Amended  By-Laws of ACTV, Inc. #                                                                                                                                                                            |
| 9.1          |   | Deleted.                                                                                                                                                                                                    |
| 9.2          |   | Deleted.                                                                                                                                                                                                    |
| 10.1         |   | Deleted.                                                                                                                                                                                                    |
| 10.2         |   | Form  of 1989 Employee Incentive Stock Option Plan. *                                                                                                                                                       |
| 10.3         |   | Form  of Amendment No. 1 to 1989 Employee Incentive Stock Option Plan. *                                                                                                                                    |
| 10.4         |   | Form  of 1989 Employee Non-qualified Stock Option Plan. *                                                                                                                                                   |
| 10.5         |   | Form  of Amendment No. 1 to 1989 Employee Non-qualified Stock Option Plan. *                                                                                                                                |
| 10.8         |   | 1996  Non-qualified Stock Option Plan. ****                                                                                                                                                                 |
| 10.9         |   | 1992  Stock Appreciation Rights Plan. ****                                                                                                                                                                  |
| 10.10        |   | 1996  Stock Appreciation Rights Plan. ****                                                                                                                                                                  |
| 10.11        |   | Deleted  ? replaced by 10.40                                                                                                                                                                                |
| 10.12        |   | Deleted  ? replaced by 10.41                                                                                                                                                                                |
| 10.13        |   | Deleted  ? replaced by 10.42                                                                                                                                                                                |
| 10.14        |   | Master  Programming License Agreement dated December 2, 1996, by and between ACTV,  Inc. and Liberty/Fox Sports, LLC. ****                                                                                  |
| 10.15        |   | Enhancement  License Agreement dated December 4, 1996, by and between ACTV, Inc. and Prime  Ticket Networks, L.P., d/b/a Fox Sports West. ++, ****                                                          |
| 10.16        |   | Enhancement  License Agreement dated February 28, 1997, by and between ACTV, Inc. and ARC  Holding, Ltd., d/b/a Fox Sports Southwest. ++, ****                                                              |
| 10.17        |   | Agreement  dated March 30, 1995 between General Instrument Corporation and ACTV, Inc.***                                                                                                                    |
| 10.18        |   | Deleted.                                                                                                                                                                                                    |
| 10.19        |   | Deleted.                                                                                                                                                                                                    |
| 10.21(a)     |   | Deleted.                                                                                                                                                                                                    |
| 10.21(b)     |   | Deleted.                                                                                                                                                                                                    |
| 10.21(c)     |   | Option  Agreement dated September 29, 1995 between ACTV, Inc. and Richard H. Bennett.  ***                                                                                                                  |
| 10.21(d)     |   | Assignment  dated September 29, 1995 between ACTV, Inc. and Richard H. Bennett. ***                                                                                                                         |
| 10.21(e)     |   | Deleted  ? replaced by 10.44(a).                                                                                                                                                                            |
| 10.21(f)     |   | Deleted.                                                                                                                                                                                                    |
| 10.21(h)     |   | Deleted  ? replaced by 10.44(b).                                                                                                                                                                            |
| 10.21(j)     |   | Deleted  ? replaced by 10.44(c).                                                                                                                                                                            |
| 10.22        |   | Deleted  ? expired.                                                                                                                                                                                         |
| 10.23(a)     |   | Deleted  ? replaced by 10.43(a).                                                                                                                                                                            |
| 10.23(b)     |   | Deleted  ? replaced by 10.43(b).                                                                                                                                                                            |
| 10.23(c)     |   | Deleted  ? replaced by 10.43(c).                                                                                                                                                                            |
| 10.23(d)     |   | Deleted.                                                                                                                                                                                                    |
| 10.23(e)     |   | Deleted.                                                                                                                                                                                                    |
| 10.23(f)     |   | Deleted.                                                                                                                                                                                                    |
| 10.23(g)     |   | Deleted.                                                                                                                                                                                                    |
| 10.24(a)     |   | Deleted.                                                                                                                                                                                                    |
| 10.24(b)     |   | Deleted.                                                                                                                                                                                                    |
| 10.24(c)     |   | Deleted.                                                                                                                                                                                                    |
| 10.24(d)     |   | Deleted.                                                                                                                                                                                                    |
| 10.24(e)     |   | Deleted.                                                                                                                                                                                                    |
| 10.25(a)     |   | Stock  Option Agreement by and between ACTV Entertainment, Inc. and William Samuels  dated March 14, 1997 and amended January 14, 1998. +                                                                   |
| 10.25(b)     |   | Stock  Option Agreement by and between ACTV Entertainment, Inc. and David Reese  dated March 14, 1997 and amended January 14, 1998. +                                                                       |
| 10.25(c)     |   | Deleted.                                                                                                                                                                                                    |
| 10.26(a)     |   | Stock  Option Agreement by and between Florida Individualized Television Network,  Inc. and William Samuels dated June 3, 1997 and amended January 14, 1998. +                                              |
| 10.26(b)     |   | Stock  Option Agreement by and between Northwest Individualized Television Network,  Inc. and William Samuels dated June 3, 1997 and amended January 14, 1998. +                                            |
| 10.26(c)     |   | Stock  Option Agreement by and between New York Individualized Television Network,  Inc. and William Samuels dated June 3, 1997 and amended January 14, 1998. +                                             |
| 10.26(d)     |   | Stock  Option Agreement by and between San Francisco Individualized Television Network,  Inc. and William Samuels dated June 3, 1997 and amended January 14, 1998. +                                        |
| 10.26(e)     |   | Stock  Option Agreement by and between Los Angeles Individualized Television  Network, Inc. and William Samuels dated March 14, 1997 and amended January  14, 1998. +                                       |
| 10.26(f)     |   | Deleted.                                                                                                                                                                                                    |
| 10.26(f)1    |   | Deleted.                                                                                                                                                                                                    |
| 10.26(g)     |   | Stock  Option Agreement by and between Florida Individualized Television Network,  Inc. and David Reese dated June 3, 1997 and amended January 14, 1998. +                                                  |
| 10.26(h)     |   | Stock  Option Agreement by and between Northwest Individualized Television Network,  Inc. and David Reese dated June 3, 1997 and amended January 14, 1998. +                                                |
| 10.26(i)     |   | Stock  Option Agreement between New York Individualized Television Network, Inc. and  David Reese dated June 3, 1997 and amended January 14, 1998. +                                                        |
| 10.26(j)     |   | Stock  Option Agreement between San Francisco Individualized Television Network,  Inc. and David Reese dated June 3, 1997 and amended January 14, 1998. +                                                   |
| 10.26(k)     |   | Stock  Option Agreement between Los Angeles Individualized Television Network, Inc.  and David Reese dated March 14, 1997 and amended January 14, 1998. +                                                   |
| 10.26(l)     |   | Deleted.                                                                                                                                                                                                    |
| 10.26(l)1    |   | Deleted.                                                                                                                                                                                                    |
| 10.27        |   | Deleted.                                                                                                                                                                                                    |
| 10.28        |   | Deleted.                                                                                                                                                                                                    |
| 10.29        |   | Deleted.                                                                                                                                                                                                    |
| 10.30        |   | Deleted  ? replaced by 10.45                                                                                                                                                                                |
| 10.31        |   | Deleted  ? replaced by 10.46                                                                                                                                                                                |
| 10.32        |   | The  Los Angeles Individualized Television Network, Inc. Sublicense Agreement  dated March 14, 1997 between ACTV Entertainment and The Los Angeles  Individualized Television Network, Inc. +               |
| 10.33        |   | The  San Francisco Individualized Television Network, Inc. Sublicense Agreement  dated January 1, 1989 between ACTV Entertainment and The San Francisco  Individualized Television Network, Inc. +          |
| 10.34        |   | The  Texas Individualized Television Network, Inc. Sublicense Agreement dated  March 14, 1997 between ACTV Entertainment and The Texas Individualized  Television Network, Inc. +                           |
| 10.35        |   | The  Los Angeles Individualized Television Network, Inc. Service Agreement dated  March 14, 1997 between ACTV, Inc., ACTV Entertainment and The Los Angeles  Individualized Television Network, Inc. +      |
| 10.36        |   | The  San Francisco Individualized Television Network, Inc. Service Agreement dated  January 1, 1998 between ACTV, Inc., ACTV Entertainment and The San Francisco  Individualized Television Network, Inc. + |
| 10.37        |   | The  Texas Individualized Television Network, Inc. Service Agreement dated March  14, 1997 between ACTV, Inc., ACTV Entertainment and The Texas Individualized  Television Network, Inc. +                  |
| 10.38        |   | Deleted.                                                                                                                                                                                                    |
| 10.39        |   | Deleted.                                                                                                                                                                                                    |
| 10.40        |   | Deleted  ? superceded by 10.40.2                                                                                                                                                                            |
| 10.41.1      |   | Deleted  ? superceded by 10.40.2.                                                                                                                                                                           |
| 10.40.2      |   | Employment  agreement dated as of August 1, 1995, as amended January 18, 2001, between  ACTV, Inc. and William Samuels. #                                                                                   |
| 10.41        |   | Deleted  ? superceded by 10.41.1.                                                                                                                                                                           |
| 10.41.1      |   | Employment  agreement dated as of August 1, 1995, as amended October 6, 1999, between  ACTV, Inc. and David Reese. ++++                                                                                     |
| 10.42        |   | Deleted  ? superceded by 10.42.2.                                                                                                                                                                           |
| 10.42.1      |   | Deleted  ? superceded by 10.42.2.                                                                                                                                                                           |
| 10.42.2      |   | Employment  agreement dated as of August 1, 1995, as amended January 18, 2001, between  ACTV, Inc. and Bruce Crowley. #                                                                                     |
| 10.43(a)     |   | Deleted  ? superceded by 10.51.                                                                                                                                                                             |
| 10.43(b)     |   | Deleted  ? superceded by 10.52.                                                                                                                                                                             |
| 10.43(c)     |   | Deleted  ? superceded by 10.53.                                                                                                                                                                             |
| 10.44(a)     |   | Deleted  ? superceded by 10.44(a)1.                                                                                                                                                                         |
| 10.44(a)1    |   | Amended  stock option agreement dated December 1, 1995 between ACTV, Inc. and William  Samuels. ++++                                                                                                        |
| 10.44(b)     |   | Deleted  ? superceded by 10.44(b)1.                                                                                                                                                                         |
| 10.44(b)1    |   | Amended  stock option agreement dated December 1, 1995 between ACTV, Inc. and David  Reese. ++++                                                                                                            |
| 10.44(c)     |   | Deleted  ? superceded by 10.44(c)1.                                                                                                                                                                         |
| 10.44(c)1    |   | Amended  stock option agreement dated December 1, 1995 between ACTV, Inc. and Bruce  Crowley. ++++                                                                                                          |
| 10.45        |   | Amended  license agreement dated March 8, 1999, between ACTV, Inc. and ACTV  Entertainment, Inc., amending and restating in full the agreement dated March  14, 1997. +++                                   |
| 10.46        |   | Amended  license agreement dated March 8, 1999, between ACTV, Inc. and HyperTV  Networks, Inc., amending and restating in full the agreement dated March 13,  1997. +++                                     |
| 10.47        |   | Patent  assignment and license agreement between ACTV, Inc. and Earthweb, Inc. dated  December 1, 1997. +++                                                                                                 |
| 10.48        |   | Deleted                                                                                                                                                                                                     |
| 10.48.1      |   | Deleted.                                                                                                                                                                                                    |
| 10.49        |   | Deleted.                                                                                                                                                                                                    |
| 10.50        |   | Deleted.                                                                                                                                                                                                    |
| 10.51        |   | Deleted  ? superceded by 10.51.1                                                                                                                                                                            |
| 10.51.1      |   | Stock  option agreement dated February 21, 1998, as amended January 10, 2001,  between ACTV, Inc. and William C. Samuels. #                                                                                 |
| 10.52        |   | Deleted  ? superceded by 10.52.1                                                                                                                                                                            |
| 10.52.1      |   | Stock  option agreement dated February 21, 1998, as amended January 10, 2001,  between ACTV, Inc. and Bruce Crowley. #                                                                                      |
| 10.53        |   | Deleted  ? superceded by 10.53.1                                                                                                                                                                            |
| 10.53.1      |   | Stock  option agreement dated February 21, 1998, as amended January 10, 2001,  between ACTV, Inc. and David Reese. #                                                                                        |
| 10.54        |   | Lease  dated as of December 1, 1999 between 225 Fourth, LLC, as landlord, and ACTV,  Inc., as tenant. ++++                                                                                                  |
| 10.54.1      |   | Lease  dated as of December 1, 1999, as amended May 23, 2000, between 225 Fourth,  LLC, as landlord, and ACTV, Inc., as tenant. #                                                                           |
| 10.55        |   | 2000  Stock Incentive Plan ##                                                                                                                                                                               |
| 10.56        |   | Cooperative  Venture Agreement dated April 13, 2000 by and among HyperTV Networks, Inc.,  Liberty Livewire LLC, and HyperTV with Livewire, LLC. ###                                                         |
| 10.57        |   | Employment  agreement dated as of October 1, 2000 between ACTV, Inc. and Kevin M. Liga. #                                                                                                                   |
| 10.58        |   | Employment  agreement dated as of October 1, 2000 between ACTV, Inc. and David D. Alworth  #                                                                                                                |
| 21           |   | Subsidiaries  of the Registrant                                                                                                                                                                             |

 

----

| *      |   | Incorporated by reference from Form S-1 Registration Statement (File  No. 33-34618)                                                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **     |   | Incorporated by reference to ACTV, Inc.’s Form 10-K for the year ended  December 31, 1993.                                                                                                                                          |
| ***    |   | Incorporated by reference from Form S-1 Registration Statement (File  No. 33-63879) which became effective on February 12, 1996.                                                                                                         |
| ****   |   | Incorporated by reference to ACTV, Inc.’s Form 10-K for the year ended  December 31, 1996.                                                                                                                                          |
| *****  |   | Incorporated by reference from the Exhibits to Schedule 13D filed by  Value Partners, Ltd. on January 23, 1998.                                                                                                                          |
| ****** |   | Incorporated by reference from Form S-3 Registration Statement filed  on December 30, 1998.                                                                                                                                              |
| +      |   | Incorporated by reference to ACTV, Inc.’s Form 10-K for the year ended  December 31, 1997.                                                                                                                                          |
| ++     |   | Certain information contained in this exhibit has been omitted and  filed separately with the Commission along with an application for  non-disclosure of information pursuant to Rule 24b-2 of the Securities Act of  1933, as amended. |
| +++    |   | Incorporated by reference to ACTV, Inc.’s Form 10-K for the year ended  December 31, 1998.                                                                                                                                          |
| ++++   |   | Incorporated by reference to ACTV, Inc.’s Form 10-K for the year ended  December 31, 1999.                                                                                                                                          |
| #      |   | Filed herewith                                                                                                                                                                                                                           |
| ##     |   | Incorporated by reference to ACTV, Inc.’s Definitive Proxy Statement  on Schedule 14A filed with the Commission on April 17, 2000.                                                                                                  |
| ###    |   | Incorporated by reference to ACTV, Inc.’s amended quarterly report on  Form 10Q/A for the quarter ended June 30, 2000                                                                                                               |

 

 

----